[co-author: Ashley Huh]
Takeaways
- The proposed regulations update outdated references and information under the current regulations, including references to temporary regulations, IRS officials, offices and addresses.
- The proposed regulations conform with current IRS procedures for determining an asset’s final value for federal estate tax purposes.
- The proposed regulations update the procedures for filing the required security instruments, and the filing requirements and payment of Section 2056A estate tax.
The United States taxes a U.S. resident on their assets above a certain amount at death and non-residents on their U.S. assets. So, if someone dies owning assets worth more than their remaining lifetime exemption, a U.S. estate tax is typically due. Payment of this tax can often be delayed with the use of a Qualified Terminable Interest Property (QTIP) trust for the benefit of a surviving (U.S.) spouse. Additionally, spouses can transfer property to the other free of any transfer taxes, as transfers of property between spouses qualify for the unlimited marital deduction. Although transfers of property to a noncitizen spouse would not qualify for the marital deduction under Internal Revenue Code (IRC) Section 2056(d)(1), IRC Section 2056(d)(2)(A) provides an exception to the general rule. If the qualified domestic trust (QDOT) requirements under IRC Section 2056A are met, property that passes from a U.S. person to a noncitizen spouse in a QDOT qualifies for the marital deduction. An executor of the estate must elect QDOT treatment.
Notable Provisions of the Proposed Regulations
On August 20, 2024, the Internal Revenue Service (IRS) issued proposed regulations updating outdated references, procedures and information of the QDOT regulations under IRC Section 2056A. The proposed regulations were published in the Federal Register on August 21, 2024.
- Removal of References to 1995 Proposed Regulations. Treas. Reg. Sections 20.2056A-2, 20.2056A-4 and 20.2056A-11 reference the 1995 temporary regulations. To reflect the publication of the final regulations, the proposed regulations replace reference to Treas. Reg. Section 20.2056A-2T(d) with Treas. Reg. Section 20.2056A-2(d).
- Update to Conform to Current IRS Procedures. The estate tax closing letter issued by the IRS has been used to determine the fair market value of the assets passing to the QDOT for purposes of Treas. Reg. Section 20.2056A-2(d)(1)(i) and (ii). As the IRS does not routinely issue estate tax closing letters as of June 1, 2015, the definition of “finally determined” under Treas. Reg. Section 20.2056A-2(d)(1)(iii) will reflect the IRS’s current procedures for establishing an asset’s final value for federal estate tax purposes.
- Removal of Outdated Addresses, Offices and Information. Under Treas. Reg. Section 20.2056A-2(d)(1)(i), QDOTs with 2 million or more assets are required to send notice to the IRS if the required security arrangement to pay the IRC Section 2056A estate tax is not replaced or renewed. Current Treas. Reg. Sections 20.2056A-2(d)(1)(i)(B) and (C) provide outdated information on the addresses and IRS officials who are required to receive notice. Taxpayers will instead be instructed to send notices to the address in “IRS Publication 4235, Collection Advisory Offices Contact Information, or as otherwise provided in IRS forms and instructions or on http://www.irs.gov.”
Additionally, the proposed regulations amend Treas. Reg. Sections 20.2056A-4(c)(6) and (c)(7) to direct the taxpayer to file the “Agreement to Pay Section 2056A Estate Tax” and the “Agreement to Roll Over Annuity Payments” with the “Chief Tax Compliance Officer, IRS (or their delegate or designee, as otherwise provided in IRS forms and instructions, or on http://www.irs.gov).”
The proposed regulations replace reference to the outdated Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication No. 500 (Publication 500) in Treas. Reg. Sections 20.2056A-2(d)(1)(i)(C)(2) and (3) with www.iccwbo.org for the most recent Publication 500.
- Updates to Procedures for Filing Required Security Instruments. Under the proposed regulations, taxpayers will no longer attach the security instrument required under Treas. Reg. Section 20.2056A-2(d) with the decedent’s federal estate tax return. Treas. Reg. Sections 20.2056A-2(d)(1)(i)(B)(4) and (C)(5) instruct the taxpayer to submit the security instrument to the Estate Tax Advisory Group. Taxpayers can find the Estate Tax Advisory Group’s contact information on http://www.irs.gov, the IRS forms and instructions, or in IRS Publication 4235.
- Filing Requirements and Payment of IRC Section 2056A Estate Tax. Under the proposed regulations, Treas. Reg. Sections 20.2056A-11(c)(1) and (c)(2) require the “Advisory Group Managers (or their delegate or designee or as otherwise provided in IRS forms and instructions or on http://www.irs.gov)” to approve the extension of time for paying the Section 2056A tax. Currently, the District Director or the Director of the service center where the Form 706-QDT is filed grants the extension.
Final Points
The IRS must receive written or electronic comments and requests for a public hearing in response to the Proposed Regulations by October 21, 2024.
Taxpayers who are currently administering QDOTs or are considering QDOTs should review the proposed regulations, as the amended rules will apply to estates of decedents who die on or after the date the final regulations are published.
These changes are more practical than impactful as they update outdated references and update procedures.
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