SEC. 2. BACKGROUND

Section 2056A(a)(2) authorizes the Internal Revenue Service to promulgate regulations that will ensure the collection of the additional estate tax imposed under § 2056A(b)(1)(A) and (B). Final regulations were issued pursuant to this authorization on December 9, 1996. Under § 20.2056A–2(d)(1)(i), if the fair market value of the assets passing to the QDOT is in excess of $2 million, either: (A) at least one Trustee must be a United States bank described in § 581, or a U.S. Branch of a foreign bank; (B) the trustee must furnish a bond in favor of the Internal Revenue Service in an amount equal to 65 percent of the fair market value of the trust corpus; or (C) the trustee must furnish an irrevocable letter of credit in an amount equal to 65 percent of the fair market value of the trust corpus. The regulations provide detailed descriptions of the required terms of the bond and letter of credit and sample forms for each.

Under § 20.2056A–2(d)(1)(i), the QDOT may alternate among the arrangements provided in paragraphs (d)(1)(i)(A), (B), and (C), provided that at any given time at least one of the arrangements is in effect.

Under § 20.2056A–2(d)(1)(ii), if the fair market value of the QDOT assets is $2 million or less, the QDOT must provide that the trustee will either satisfy the requirements listed above, or limit the fair market value of real property that is held by the trust and situated outside the United States to 35 percent of the value of the trust at the close of the taxable year. A special look-through rule applies for interests in corporations or partnerships that own real property. In addition, an executor may elect to exclude up to $600,000 in value of a principal residence passing to the QDOT

in determining if the $2 million threshold has been exceeded.

This revenue procedure contains sample trust language that, if adopted in the trust instrument, will be recognized as meeting the requirements of § 20.2056A–2(d)(1)(i)(A), (B), and (C), and (d)(1)(ii).