## Facts

- A decedent died survived by a spouse; the decedent owned an IRA (or similar defined contribution plan) included in the gross estate.
- The decedent’s will created an irrevocable marital trust valid under local law and named the trust as beneficiary of the IRA.
- The trust required all trust “income” to be paid at least annually to the spouse for life, barred distributions to anyone else during the spouse’s life, and provided remainder to the decedent’s children.
- The spouse had rights (directly or through the trustee) to compel investment of the trust and IRA assets in investments productive of a reasonable income; the IRA terms did not bar withdrawals beyond required minimum distributions.
- The executor sought to elect qualified terminable interest property (QTIP) treatment for both the marital trust and the IRA.
- Three situations varied how “income” from the IRA was defined and made available to the spouse:
  - One tied the spouse’s entitlement to the IRA’s actual internal income (or an IRS-acceptable unitrust method).
  - One applied a local-law allocation under which only 10% of required plan distributions were treated as income and the balance as principal.
  - One used a unitrust regime meeting the regulatory standards for defining “income.”

## Issues

1. Under what circumstances does a surviving spouse have a “qualifying income interest for life” in an IRA (or similar plan) payable to a marital trust, permitting QTIP treatment for both the IRA and the trust under I.R.C. § 2056(b)(7)?
2. Whether a local-law rule allocating only 10% of required retirement distributions to “income” can satisfy the “all income payable at least annually” requirement for QTIP.
3. Whether a unitrust definition of income that satisfies Treas. Reg. § 1.643(b)-1 can support QTIP treatment for an IRA payable to a marital trust.

## Decision

- The IRS ruled that the spouse has a qualifying income interest for life in both the trust and the IRA when the spouse is entitled (at least annually) to all income of the IRA, determined under an acceptable definition of “income,” and can compel investment in income-producing assets.
- The IRS ruled that the spouse does not have a qualifying income interest for life in the IRA when “income” consists only of 10% of required minimum distributions allocated to income under local law; in that circumstance, the IRA does not qualify for QTIP treatment.
- The IRS ruled that a unitrust approach satisfying Treas. Reg. § 1.643(b)-1 is an acceptable definition of “income” for QTIP purposes; under such a regime, both the trust and the IRA can qualify as QTIP property.
- The ruling modified and superseded prior IRS guidance on similar IRA-to-marital-trust arrangements.

## Legal Principles

- QTIP treatment under I.R.C. § 2056(b)(7) requires that the surviving spouse be entitled for life to all income from the property, payable at least annually, and that no one else may receive or be appointed the property during the spouse’s life.
- When a retirement account is payable to a marital trust, the account may be treated as a separate item of QTIP property only if the spouse has a qualifying income interest for life in both the trust and the account.
- “Income” must be determined under the governing instrument and applicable local law only if the resulting definition is acceptable under Treas. Reg. § 1.643(b)-1; accepted approaches include qualifying unitrust regimes.
- A regime that labels only a small fixed fraction of required retirement distributions (such as 10%) as “income,” with the remainder allocated to principal, does not satisfy the “all income” requirement for QTIP as applied to the retirement account.
- The spouse’s right to compel investment in assets productive of a reasonable income (or compliant total-return approach) is relevant to ensuring the spouse’s income interest is meaningful for QTIP purposes.

## Conclusion

The IRS concluded that an IRA payable to a marital trust can qualify for QTIP only if the spouse’s entitlement to IRA “income” is measured by an IRS-acceptable income definition (including compliant unitrust methods) and is payable at least annually; reliance on a 10% allocation of required plan distributions to “income” is insufficient to make the IRA QTIP property.


Rev. Rul. 2006-26, 2006-22 I.R.B. 939 (2006)