Jul 1, 2006 12:00 PM

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.”

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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