Jul 1, 2006 12:00 PM, By Natalie B. Choate, of counsel, Bingham McCutchen LLP, Boston

By: By Natalie B. Choate, of counsel, Bingham McCutchen LLP, Boston

If an asset is to qualify for the federal estate tax marital deduction as qualified terminal interest property (QTIP), the decedent's surviving spouse must be entitled to all of the income for life from such asset.¹ When an individual retirement account (IRA)² is payable to a marital trust as beneficiary, what is the “income” the spouse must be entitled to with respect to the IRA? The Internal Revenue Service has answered this question in Revenue Ruling 2006-26,³ issued in May. In the IRS' view, the spouse must be entitled either to the IRA's internal investment income or to a 3 percent to 5 percent “unitrust” payout. A trust that uses the “10 percent rule” adopted (as part of the 1997 Uniform Principal and Income Act, or UPIA 1997) in a majority of states will not qualify for the marital deduction. Despite this ruling, many practitioners (even in UPIA states) will not need to amend their marital trust forms. But some estate planners will need to amend their documents.

The Treasury regulations, in defining trust income,⁴ provide that it is generally determined under the governing instrument and applicable state law, with certain limits. One of the limits is that an allocation between income and principal pursuant to local law “will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year.”

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