AMENDMENTS RELATED TO TITLE V OF THE 1988 ACT.

SEC. 7815. AMENDMENTS RELATED TO TITLE V OF THE 1988 ACT. (a) Amendments Related to Section 5012 of the 1988 Act.— (1) Subparagraph (B) of section 7702A(c)(3) is amended to read as follows: “(B) Treatment of certain benefit increases.—For purposes of subparagraph (A), the term ‘material change’ includes any increase in the death benefit under the contract or any increase in, or addition of, a qualified additional benefit under the contract. Such term shall not include— “(i) any increase which is attributable to the payment of premiums necessary to fund the lowest level of the death benefit and qualified additional benefits payable in the 1st 7 contract years (determined after taking into account death benefit increases described in subparagraph (A) or (B) of section 7702(e)(2)) or to crediting of interest or other earnings (including policyholder dividends) in respect of such premiums, and “(ii) to the extent provided in regulations, any cost-of-living increase based on an established broad-based index if such increase is funded ratably over the remaining period during which premiums are required to be paid under the contract.” (2) Paragraph (2) of section 5012(e) of the 1988 Act is amended by striking “continues to make level annual premium payments over the life of the contract” and inserting “makes at least 7 level annual premium payments”. (3) Subparagraph (A) or section 72(e)(11) is amended by adding at the end the following new sentence: “The preceding sentence shall not apply to any contract described in paragraph (5)(D).” (4) Paragraph (4) of section 7702A(c) is amended— (A) by striking “under $10,000” in the paragraph heading and inserting “of $10,000 OR less”, and (B) by striking “the same insurer” and inserting “the same policyholder”. (5) Section 72(e)(U)(A) is amended by striking “12-month period” and inserting “calendar year”. (b) Amendment Related to Section 5021 of the 1988 Act.—Subsection (e) of section 5021 of the 1988 Act is amended by striking “no provision in any law (whether enacted before, on, or after the 103 STAT. 2415date of the enactment of this Act)” and inserting “no provision in any law enacted after the date of the enactment of this Act”. (c) Amendment Related to Section 5032 of the 1988 Act.—Subsection (b) of section 2101 is amended by adding at the end the following new sentence: “For purposes of the preceding sentence, there shall be appropriate adjustments in the application of section 2001(c)(3) to reflect the difference between the amount of the credit provided under section 2102(c) and the amount of the credit provided under section 2010.” (d) Amendments Related to Section 5033 of the 1988 Act.— (1)(A) Paragraph (2) of section 2523(i) is amended by striking “made by the donor to such spouse” and inserting “which are made by the donor to such spouse and with respect to which a deduction would be allowable under this section but for paragraph (1)”. (B) The amendment made by subparagraph (A) shall apply with respect to gifts made after June 29, 1989. (2) Subsection (a) of section 2523 is amended by striking “who is a citizen or resident”. (3) Paragraph (3) of section 2106(a) is amended by striking “allowed where spouse is citizen”. (4)(A) Subparagraph (B) of section 2056(d)(2) is amended to read as follows: “(B) Special rule.—If any property passes from the decedent to the surviving spouse of the decedent, for purposes of subparagraph (A), such property shall be treated as passing to such spouse in a qualified domestic trust if— “(i) such property is transferred to such a trust before the date on which the return of the tax imposed by this chapter is made, or “(ii) such property is irrevocably assigned to such a trust under an irrevocable assignment made on or before such date which is enforceable under local law.” (B) In the case of the estate of a decedent dying before the date of the enactment of this Act, the period during which the transfer (or irrevocable assignment) referred to in section 2056(d)(2)(B) of the Internal Revenue Code of 1986 (as amended by subparagraph (A)) may be made shall not expire before the date 1 year after such date of enactment. (5) Subsection (d) of section 2056 is amended by adding at the end the following new paragraph: “(4) Special rule where resident spouse becomes citizen.— Paragraph (1) shall not apply if— “(A) the surviving spouse of the decedent becomes a citizen of the United States before the day on which the return of the tax imposed by this chapter is made, and “(B) such spouse was a resident of the United States at all times after the date of the death of the decedent and before becoming a citizen of the United States.” (6) Paragraph (3) of section 2056(d) is amended— (A) by striking “section 2001” and inserting “this chapter”, and (B) by inserting before the period at the end the following: “and without regard to subsection (d)(3) of such section”. (7)(A) Subsection (a) of section 2056A is amended— (i) by amending paragraph (1) to read as follows: 103 STAT. 2416 “(1) the trust instrument requires that at least 1 trustee of the trust be an individual citizen of the United States or a domestic corporation and that no distribution from the trust may be made without the approval of such a trustee,”, and (ii) by striking paragraph (2) and redesignating paragraphs (3) and (4) as paragraphs (2) and (3), respectively. (B) Subsection (b) of section 2056A is amended by redesignating paragraphs (3) through (8) as paragraphs (4) through (9), respectively, and by inserting after paragraph (2) the following new paragraph: “(3) Certain lifetime distributions exempt from tax.— “(A) Income distributions.—No tax shall be imposed by paragraph (1)(A) on any distribution of income to the surviving spouse. “(B) Hardship Exemption —No tax shall be imposed by paragraph (1)(A) on any distribution to the surviving spouse on account of hardship.” (C) Subparagraph (A) of section 2056A(b)(1) is amended by striking “other than a distribution of income required under subsection (a)(2)”. (D) Paragraph (4) of section 2056A(b) (as redesignated by subparagraph (B)) is amended to read as follows: “(4) Tax where trust ceases to qualify.—If any qualified domestic trust ceases to meet the requirements of paragraphs (1) and (2) of subsection (a), the tax imposed by paragraph (1) shall apply as if the surviving spouse died on the date of such cessation.” (8) Subsection (d) of section 2056 is amended by adding at the end the following new paragraph: “(4) Reformations permitted.— “(A) In general.—In the case of any property with respect to which a deduction would be allowable under subsection (a) but for this subsection, the determination of whether a trust is a qualified domestic trust shall be made— “(i) as of the date on which the return of the tax imposed by this chapter is made, or “(ii) if a judicial proceeding is commenced on or before the due date (determined with regard to extensions) for filing such return to change such trust into a trust which is a qualified domestic trust, as of the time when the changes pursuant to such proceeding are made. “(B) Statute of limitations.—If a judicial proceeding described in subparagraph (A)(ii) is commenced with respect to any trust, the period for assessing any deficiency of tax attributable to any failure of such trust to be a qualified domestic trust shall not expire before the date 1 year after the date on which the Secretary is notified that the trust has been changed pursuant to such judicial proceeding or that such proceeding has been terminated.” (9) Subsection (b) of section 2056A is amended by adding at the end the following new paragraphs: “(10) Certain benefits allowed.— “(A) In general.—If any property remaining in the qualified domestic trust on the date of the death of the surviving spouse is includible in the gross estate of such 103 STAT. 2417spouse for purposes of this chapter (or would be includible if such spouse were a citizen or resident of the United States), any benefit which is allowable (or would be allowable if such spouse were a citizen or resident of the United States) with respect to such property to the estate of such spouse under section 2032, 2032A, 2055, 2056, or 6166 shall be allowed for purposes of the tax imposed by paragraph (1)(B). “(B) Section 803.—If the estate of the surviving spouse meets the requirements of section 303 with respect to any property described in subparagraph (A), for purposes of section 303, the tax imposed by paragraph (1)(B) with respect to such property shall be treated as a Federal estate tax payable with respect to the estate of the surviving spouse. “(C) Section 6161 (a) (1).—The provisions of section 6161(a)(2) shall apply with respect to the tax imposed by paragraph (1)(B), and the reference in such section to the executor shall be treated as a reference to the trustees of the trust. “(11) Special rule where distribution tax paid out of trust.—For purposes of this subsection, if any portion of the tax imposed by paragraph (1)(A) with respect to any distribution is paid out of the trust, an amount equal to the portion so paid shall be treated as a distribution described in paragraph (1)(A). “(12) Special rule where spouse becomes citizen.— If the surviving spouse of the decedent becomes a citizen of the United States and if— “(A) such spouse was a resident of the United States at all times after the date of the death of the decedent and before such spouse becomes a citizen of the United States, “(B) no tax was imposed by paragraph (1)(A) with respect to any distribution before such spouse becomes such a citizen, or “(C) such spouse elects— “(i) to treat any distribution on which tax was imposed by paragraph (1)(A) as a taxable gift made by such spouse for purposes of— “(I) section 2001, and “(II) determining the amount of the tax imposed by section 2501 on actual taxable gifts made by such spouse during the year in which the spouse becomes a citizen or any subsequent year, and “(ii) to treat any reduction in the tax imposed by paragraph (1)(A) by reason of the credit allowable under section 2010 with respect to the decedent as a credit allowable to such surviving spouse under section 2505 for purposes of determining the amount of the credit allowable under section 2505 with respect to taxable gifts made by the surviving spouse during the year in which the spouse becomes a citizen or any subsequent year, paragraph (1)(A) shall not apply to any distributions after such spouse becomes such a citizen (and paragraph (1)(B) shall not apply). “(13) Coordination with section 1015.—For purposes of section 1015, any distribution on which tax is imposed by para-103 STAT. 2418graph (1)(A) shall be treated as a transfer by gift, and any tax paid under paragraph (1)(A) shall be treated as a gift tax.” (10) Paragraph (2) of section 2056A(c) is amended by striking “The term” and inserting “Except as provided in regulations, the term”. (11) Clause (ii) of section 2056A(b)(2)(B) is amended by striking “as a credit or refund” and inserting “as a credit or refund (with interest)”. (12) Paragraph (2) of section 2056A(b) is amended by adding at the end the following new subparagraph: “(C) Special rule where decedent has more than 1 qualified domestic trust.—If there is more than 1 qualified domestic trust with respect to any decedent, the amount of the tax imposed by paragraph (1) with respect to such trusts shall be determined by using the highest rate of tax in effect under section 2001 as of the date of the decedent’s death (and the provisions of paragraph (3)(B) shall not apply) unless, pursuant to a designation made by the decedent’s executor, there is 1 person— “(i) who is an individual citizen of the United States or a domestic corporation and is responsible for filing all returns of tax imposed under paragraph (1) with respect to such trusts and for paying all tax so imposed, and “(ii) who meets such requirements as the Secretary may by regulations prescribe.” (13) Section 2056A is amended by adding at the end the following new subsection: “(e) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations under which there may be treated as a qualified domestic trust any annuity or other payment which is includible in the decedent’s gross estate and is by its terms payable for life or a term of years.” (14) In the case of the estate of, or gift by, an individual who was not a citizen or resident of the United States but was a resident of a foreign country with which the United States has a tax treaty with respect to estate, inheritance, or gift taxes, the amendments made by section 5033 of the 1988 Act shall not apply to the extent such amendments would be inconsistent with the provisions of such treaty relating to estate, inheritance, or gift tax marital deductions. In the case of the estate of an individual dying before the date 3 years after the date of the enactment of this Act, or a gift by an individual before the date 3 years after the date of the enactment of this Act, the requirement of the preceding sentence that the individual not be a citizen or resident of the United States shall not apply. (15) Paragraph (5) of section 2O56A(b) (as redesignated by paragraph (7)(B) of this subsection) is amended to read as follows: “(5) Due date.— “(A) Tax on distributions.—The estate tax imposed by paragraph (1)(A) shall be due and payable on the 15th day of the 4th month following the calendar year in which the taxable event occurs; except that the estate tax imposed by paragraph (1)(A) on distributions during the calendar year in which the surviving spouse dies shall be due and payable 103 STAT. 2419not later than the date on which the estate tax imposed by paragraph (1)(B) is due and payable. “(B) Tax at death of spouse.—The estate tax imposed by paragraph (1)(B) shall be due and payable on the date 9 months after the date of such death.” (16) For purposes of applying section 2040(a) of the Internal Revenue Code of 1986 with respect to any joint interest to which section 2040(b) of such Code does not apply solely by reason of section 2056(d)(1)(B) of such Code, any consideration furnished before July 14, 1988, by the decedent for such interest to the extent treated as a gift to the spouse of the decedent for purposes of chapter 12 of such Code shall be treated as consideration originally belonging to such spouse and never acquired by such spouse from the decedent. (e) Amendments Related to Section 5041 of the 1988 Act.— (1) Subparagraph (A) of section 460(e)(6) is amended— (A) by striking “the building, construction, reconstruction, or rehabilitation of” and inserting “activities referred to in paragraph (4) with respect to”, and (B) by striking clause (i) and inserting the following: “(i) dwelling units (as defined in section 167(k)) contained in buildings containing 4 or fewer dwelling units (as so defined), and”. (2)(A) Paragraph (4) of section 5041(b) of the 1988 Act is amended by inserting “, as amended by title I of this Act,” after “1986 Code”. (B) Paragraph (3) of section 56(a) is amended by striking “The preceding sentence shall not” and inserting “The first sentence of this paragraph shall not”. (3) Subparagraph (C) of section 5041(e)(1) of the 1988 Act is amended by striking “subsections (a), (b), and (c)” and inserting “subsections (a) and (b)”. (4) Clause (i) of section 56(g)(4)(D) is amended by adding “and” at the end of subclause (III) and by striking subclauses (IV) and (V) and inserting the following new subclause: “(IV) paragraphs (6), (7), and (8) shall not apply.” (f) Amendment Related to Section 5053 of the 1988 Act.—Subsection (d) of section 145 is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: (3) Certain property treated as new property.—Solely for purposes of determining under paragraph (2)(A) whether the 1st use of property is pursuant to tax-exempt financing— “(A) In general.—If— “(i) the 1st use of property is pursuant to taxable financing, “(ii) there was a reasonable expectation (at the time such taxable financing was provided) that such financing would be replaced by tax-exempt financing, and “(iii) the taxable financing is in fact so replaced within a reasonable period after the taxable financing was provided, then the 1st use of such property shall be treated as being pursuant to the tax-exempt financing. “(B) Special rule where no operating state or local program for tax-exempt financing.—If, at the time of the 1st use of property, there was no operating State or local 103 STAT. 2420program for tax-exempt financing of the property, the 1st use of the property shall be treated as pursuant to the 1st tax-exempt financing of the property. “(C) Definitions.—For purposes of this paragraph— “(i) Tax-exempt financing.—The term ‘tax-exempt financing’ means financing provided by tax-exempt bonds. “(ii) Taxable financing.—The term ‘taxable financing’ means financing which is not tax-exempt financing.” (g) Amendment Related to Section 5076 of the 1988 Act.—Paragraph (3) of section 453A(b) is amended to read as follows: “(3) Exception for personal use and farm property.— An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition— “(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or “(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e) (4) or (5)).” (h) Amendment Related to Section 5077 of the 1988 Act.—Clause (ii) of section 382(1)(3)(C) is amended by striking “for purposes of subclause (III),” and inserting “For purposes of subclause (III),”.