AMENDMENTS RELATED TO TITLE XIV OF THE REFORM ACT.

SEC. 1014. AMENDMENTS RELATED TO TITLE XIV OF THE REFORM ACT. (a) Amendments Related to Section 1401 of the Reform Act.— (1) Subsection (e) of section 672 of the 1986 Code is amended to read as follows: “(e) Grantor Treated as Holding Any Power or Interest of Grantor’s Spouse.— “(1) In general.— For purposes of this subpart, a grantor shall be treated as holding any power or interest held by— “(A) any individual who was the spouse of the grantor at the time of the creation of such power or interest, or “(B) any individual who became the spouse of the grantor after the creation of such power or interest, but only with respect to periods after such individual became the spouse of the grantor. “(2) Marital status.—For purposes of paragraph (1)(A), an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married.” (2) Paragraph (3) of section 675 of the 1986 Code is amended by adding at the end thereof the following new sentence: “For periods during which an individual is the spouse of the grantor (within the meaning of section 672(e)(2)), any reference in this paragraph to the grantor shall be treated as including a reference to such individual.” (3) Subsection (c) of section 674 of the 1986 Code is amended by adding at the end thereof the following new sentence: “For periods during which an individual is the spouse of the grantor (within the meaning of section 672(e)(2)), any reference in this subsection to the grantor shall be treated as including a reference to such individual.” (b) Amendment Related to Section 1402 of the Reform Act.—Section 673 of the 1986 Code is amended by adding at the end thereof the following new subsections: “(c) Special Rule for Determining Value of Reversionary Interest.—For purposes of subsection (a), the value of the grantor’s reversionary interest shall be determined by assuming the maxi-mum exercise of discretion in favor of the grantor. “(d) Postponement of Date Specified for Reacquisition.—Any postponement of the date specified for the reacquisition of possession or enjoyment of the reversionary interest shall be treated as a new transfer in trust commencing with the date on which the postponement is effective and terminating with the date prescribed by the postponement. However, income for any period shall not be included in the income of the grantor by reason of the preceding sentence if such income would not be so includible in the absence of such postponement.” (c) Amendments Related to Section 1403 of the Reform Act.— 102 STAT. 3560 (1) If a beneficiary of a trust to which section 664 of the 1986 Code applies elects (at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe) to have this paragraph apply, such beneficiary shall be entitled to the benefits of section 1403(c)(2) of the Reform Act with respect to amounts included in gross income under section 664(b) of the 1986 Code in the same manner as if such amounts were included in gross income under section 652(a) of the 1986 Code. (2) Any trust beneficiary may elect (at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe) to waive the benefits of section 1403(c)(2) of the Reform Act. (3) (A) For purposes of determining the gross income of any pass-thru entity, such pass-thru entity shall not be allowed the benefits of section 806(e)(2)(C) (other than with respect to income from a common trust fund) or 1403(c)(2) of the Reform Act if such pass-thru entity is required to change its taxable year by reason of the amendments made by section 806 or 1403 of the Reform Act. (B) For purposes of subparagraph (A), the term “pass-thru entity” means any trust, partnership, S corporation, or common trust fund. (4) If any trust was required to change its taxable year by the amendments made by section 1403 of the Reform Act, such change shall be treated as initiated by such trust and approved by the Secretary of the Treasury or his delegate. (d) Amendments Related to Section 1404 of the Reform Act.— (1) Subsection (a) of section 1404 of the Reform Act is amended— (A) by striking out “Subsection (k) of section 6654” and inserting in lieu thereof “Subsection (1) of section 6654, as amended by section 1841 of this Act”, and (B) by striking out “ ‘(k) Trusts” and inserting in lieu thereof ”(1) Trusts (2) Subsection (1) of section 6654 of the 1986 Code is amended to read as follows: “(l) Estates and Trusts.— (1) In general.—Except as otherwise provided in this subsection, this subsection shall apply to any estate or trust. (2) Exception for estates and certain trusts.— With respect to any taxable year ending before the date 2 years after the date of the decedent’s death, this section shall not apply to— “(A) the estate of such decedent, or “(B) any trust— “(i) all of which was treated (under subpart E of part I of subchapter J of chapter 1) as owned by the decedent, and “(ii) to which the residue of the decedent’s estate will pass under his will. (3) Exception for charitable trusts and private foundations.—This section shall not apply to any trust which is subject to the tax imposed by section 511 or which is a private foundation. (4) Special rule for annualizations.—In the case of any estate or trust to which this section applies, subsection (d)(2)(B)(i) shall be applied by substituting ‘ending before the 102 STAT. 3561date 1 month before the due date for the installment’ for ‘ending before the due date for the installment’.” (3) Subsection (g) of section 643 of the 1986 Code is amended— (A) by striking out the last sentence of paragraph (1), and (B) by amending paragraph (2) to read as follows: “(2) Time for making election.—An election under paragraph (1) shall be made on or before the 65th day after the close of the taxable year of the trust and in such manner as the Secretary may prescribe.” (4) Subsection (g) of section 643 of the 1986 Code is amended by adding at the end thereof the following new paragraph: (3) Extension to last year of estate.— In the case of a taxable year reasonably expected to be the last taxable year of an estate— “(A) any reference in this subsection to a trust shall be treated as including a reference to an estate, and “(B) the fiduciary of the estate shall be treated as the trustee.” (e) Amendments Related to Section 1411 of the Reform Act.— (1) Paragraph (3) of section l(i) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(C) Coordination with section 644.— If tax is imposed under section 644(a)(1) with respect to the sale or exchange of any property of which the parent was the transferor, for purposes of applying subparagraph (A) to the taxable year of the parent in which such sale or exchange occurs— “(i) taxable income of the parent shall be increased by the amount treated as included in gross income under section 644(a)(2)(AXi), and “(ii) the amount described in subparagraph (A)(ii) shall be increased by the amount of the excess referred to in section 644(a)(2)(A).” (2) The last sentence of subparagraph (A) of section 1(i)(3) of the 1986 Code is amended by striking out “any deduction or credit” and inserting in lieu thereof “any exclusion, deduction, or credit”. (3) Subparagraph (A) of section 1(1)(4) of the 1986 Code is amended— (A) by striking out “gross income for the taxable year which is not earned income” in clause (i) and inserting in lieu thereof “adjusted gross income for the taxable year which is not attributable to earned income”, (B) by striking out “his deduction” in clause (ii)(II) and inserting in lieu thereof “his deductions”, (C) by striking out “the deductions allowed” in clause (ii)(II) and inserting in lieu thereof “the itemized deductions allowed”, and (D) by striking out “gross income” in clause (ii)(II) and inserting in lieu thereof “adjusted gross income”. (4) Clause (iv) of section 6103(e)(1)(A) of the 1986 Code is amended by striking out “section l(j)” and inserting in lieu thereof “section l(i) or 59(j)”. (5) (A) Section 59 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(j) Treatment of Unearned Income of Minor Children.— 102 STAT. 3562 “(1) Limitation on Exemption Amount.— In the case of a child to whom section l(i) applies, the exemption amount for purposes of section 55 shall not exceed the sum of— “(A) such child’s earned income (as defined in section 911(d)(2)) for the taxable year, plus “(B) $1,000. “(2) Limitation based on parental minimum tax.— “(A) In general.—In the case of a child to whom section l(i) applies, the amount of the tax imposed by section 55 shall not exceed such child’s share of the allocable parental minimum tax. “(B) Allocable parental minimum tax.— For purposes of this paragraph, the term ‘allocable parental minimum tax’ means the excess of— “(i) the tax which would be imposed by section 55 on the parent if— “(I) the amount of the parent’s tentative mini-mum tax were increased by the aggregate of the tentative minimum taxes of all children of the parent to whom section l(i) applies, and “(II) the amount of the parent’s regular tax were increased by the aggregate of the regular taxes of all children of the parent to whom section l(i) applies, over “(ii) the tax imposed by section 55 on the parent without regard to this subparagraph. “(C) Child share.—A child’s share of any allocable parental minimum tax shall be determined under rules similar to the rules of section l(i)(3)(B). “(D) Others rules made applicable.—For purposes of this paragraph, rules similar to the rules of paragraphs (5) and (6) of section l(i) shall apply.” (B) The amendment made by subparagraph (A) shall apply to taxable years beginning after December 31, 1988. (6) Subparagraph (A) of section 1(i)(5) of the 1986 Code is amended by striking out “custodial parent” and inserting in lieu thereof “custodial parent (within the meaning of section 152(e))”. (7) Paragraph (3) of section 1(i) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(C) Special rule where parent has different taxable year.—Except as provided in regulations, if the parent does not have the same taxable year as the child, the allocable parental tax shall be determined on the basis of the taxable year of the parent ending in the child’s taxable year.” (f) Amendment Related to Section 1421 of the Reform Act.—Subsection (a) of section 1421 of the Reform Act is amended by striking out “within the time prescribed for filing such return (including extensions thereof)”. (g) Amendments Related to Section 1431 of the Reform Act.— (1) Subsection (a) of section 2611 of the 1986 Code is amended by striking out “generation-skipping transfers” and inserting in lieu thereof “generation-skipping transfer”. (2) Subsection (b) of section 2611 of the 1986 Code is amended by striking out paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively. 102 STAT. 3563 (3) (A) Section 2642 of the 1986 Code is amended by adding at the end thereof the following new subsection: (e) Special Rules for Charitable Lead Annuity Trusts.— (1) In general.— For purposes of determining the inclusion ratio for any charitable lead annuity trust, the applicable fraction shall be a fraction— “(A) the numerator of which is the adjusted GST exemption, and “(B) the denominator of which is the value of all of the property in such trust immediately after the termination of the charitable lead annuity. “(2) Adjusted gst exemption.—For purposes of paragraph (1), the adjusted GST exemption is an amount equal to the GST exemption allocated to the trust increased by interest determined— “(A) at the interest rate used in determining the amount of the deduction under section 2055 or 2522 (as the case may be) for the charitable lead annuity, and “(B) for the actual period of the charitable lead annuity. (3) Definitions.—For purposes of this subsection— “(A) Charitable lead annuity trust.—The term ‘charitable lead annuity trust’ means any trust in which there is a charitable lead annuity. “(B) Charitable lead annuity.—The term ‘charitable lead annuity’ means any interest in the form of a guaranteed annuity with respect to which a deduction was allowed under section 2055 or 2522 (as the case may be). (4) Coordination with subsection (d).—Under regulations, appropriate adjustments shall be made in the application of subsection (d) to take into account the provisions of this subsection.” (B) The amendment made by subparagraph (A) shall apply for purposes of determining the inclusion ratio with respect to property transferred after October 13, 1987. (4) (A) Section 2642 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(f) Special Rules for Certain Inter Vivos Transfers.—Except as provided in regulations— “(1) In general.— For purposes of determining the inclusion ratio, if— “(A) an individual makes an inter vivos transfer of property, and “(B) the value of such property would be includible in the gross estate of such individual under chapter 11 if such individual died immediately after making such transfer (other than by reason of section 2035), any allocation of GST exemption to such property shall not be made before the close of the estate tax inclusion period (and the value of such property shall be determined under paragraph (2). If such transfer is a direct skip, such skip shall be treated as occurring as of the close of the estate tax inclusion period. “(2) Valuation.— In the case of any property to which paragraph (1) applies, the value of such property shall be— “(A) if such property is includible in the gross estate of the transferor (other than by reason of section 2035), its value for purposes of chapter 11, or 102 STAT. 3564 “(B) if subparagraph (A) does not apply, its value as of the close of the estate tax inclusion period (or, if any allocation of GST exemption to such property is not made on a timely filed gift tax return for the calendar year in which such period ends, its value as of the time such allocation is filed with the Secretary). “(3) Estate tax inclusion period.— For purposes of this subsection, the term ‘estate tax inclusion period’ means any period after the transfer described in paragraph (1) during which the value of the property involved in such transfer would be includible in the gross estate of the transferor under chapter 11 if he died. Such period shall in no event extend beyond the earlier of— “(A) the date on which there is a generation-skipping transfer with respect to such property, or “(B) the date of the death of the transferor. “(4) Treatment or spouse.—Except as provided in regulations, any reference in this subsection to an individual or transferor shall be treated as including a reference to the spouse of such individual or transferor. “(5) Coordination with subsection (d).—Under regulations, appropriate adjustments shall be made in the application of subsection (d) to take into account the provisions of this subsection.” (B) Paragraph (2) of section 2642(a) of the 1986 Code is amended by striking out the last sentence. (C) Subparagraph (A) of section 2642(b)(2) of the 1986 Code is amended by inserting before the period at the end thereof the following: “; except that, if the requirements prescribed by the Secretary respecting allocation of post-death changes in value are not met, the value of such property shall be determined as of the time of the distribution concerned.” (D) Subsection (b) of section 2642 of the 1986 Code is amended by inserting “Except as provided in subsection (f)—” immediately after the subsection heading. (E) Subparagraph (B) of section 2642(b)(2) of the 1986 Code is amended— (i) by striking out “at or after the death of the transferor” and inserting in lieu thereof “to property transferred as a result of the death of the transferor”; and (ii) by striking out “at or after death” in the subparagraph heading and inserting in lieu thereof “to property transferred at death”. (F) Paragraph (3) of section 2642(b) of the 1986 Code is amended— (i) by striking out “to any property is made during the life of the transferor but is” and inserting in lieu thereof “to any property not transferred as a result of the death of the transferor is”; and (ii) by striking out “Inter vivos allocations” in the subparagraph heading and inserting in lieu thereof “Allocations to inter vivos transfers”. (5) (A) Paragraph (1) of section 2613(a) of the 1986 Code is amended by striking out “a person assigned” and inserting in lieu thereof “a natural person assigned”. (B) Subsection (c) of section 2612 of the 1986 Code is amended by adding at the end thereof the following new paragraph: 102 STAT. 3565 “(3) Look-thru rules not to apply.—Solely for purposes of determining whether any transfer to a trust is a direct skip, the rules of section 2651(e)(2) shall not apply.” (6) Subsection (c) of section 2652 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(3) Certain support obligations disregarded.— The fact that income or corpus of the trust may be used to satisfy an obligation of support arising under State law shall be dis-regarded in determining whether a person has an interest in the trust, if— “(A) such use is discretionary, or “(B) such use is pursuant to the provisions of any State law substantially equivalent to the Uniform Gifts to Minors Act (7) Paragraph (2) of section 2612(c) of the 1986 Code is amended by adding at the end thereof the following new sentence: “If any transfer of property to a trust would be a direct skip but for this paragraph, any generation assignment under this paragraph shall apply also for purposes of applying this chapter to transfers from the portion of the trust attributable to such property.” (8) Paragraph (2) of section 2652(c) of the 1986 Code is amended— (A) by striking out “nominal interests” in the paragraph heading and inserting In lieu thereof “interests”, and (B) by striking out “the tax” and inserting in lieu thereof “any tax”. (9) Paragraph (1) of section 2652(a) of the 1986 Code is amended— (A) by striking out “a transfer of a kind” each place it appears and inserting in lieu thereof “any property”, and (B) by adding at the end thereof the following new sentence: “An individual shall be treated as transferring any property with respect to which such individual is the transferor.” (10) Section 2663 of the 1986 Code is amended by striking out “and” at the end of paragraph (1), by striking out the period at the end of paragraph (2) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new paragraph: “(3) regulations providing for such adjustments as may be necessary to the application of this chapter in the case of any arrangement which, although not a trust, is treated as a trust under section 2652(b).” (11) Paragraph (3) of section 2651(e) of the 1986 Code is amended to read as follows: “(3) Treatment of certain charitable organizations and governmental entities.—Any— “(A) organization described In section 511(a)(2), “(B) charitable trust described in section 511(b)(2), and “(C) governmental entity, shall be assigned to the transferor’s generation.” (12) Paragraph (2) of section 2654(a) of the 1986 Code is amended— (A) by striking out “any increase” and inserting in lieu thereof “any increase or decrease”, and 102 STAT. 3566 (B) by striking out “such increase” and inserting in lieu thereof “such increase or decrease (as the case may be)”. (13) Subsection (b) of section 2654 of the 1986 Code is amended to read as follows: “(b) Certain Trusts Treated as Separate Trusts.—For purposes of this chapter— “(1) the portions of a trust attributable to transfers from different transferors shall be treated as separate trusts, and “(2) substantially separate and independent shares of different beneficiaries in a trust shall be treated as separate trusts. Except as provided in the preceding sentence, nothing in this chapter shall be construed as authorizing a single trust to be treated as 2 or more trusts.” (14) Paragraph (3) of section 2652(a) of the 1986 Code is amended— (A) by striking out “any property” in subparagraphs (A) and (B) and inserting in lieu thereof “any trust”, and (B) by striking out “may elect to treat such property” and inserting in lieu thereof “may elect to treat all of the property in such trust”. (15) Paragraph (2) of section 2612(a) of the 1986 Code is amended to read as follows: “(2) Certain partial terminations treated as taxable.—If, upon the termination of an interest in property held in trust by reason of the death of a lineal descendant of the transferor, a specified portion of the trust’s assets are distributed to 1 or more skip persons (or 1 or more trusts for the exclusive benefit of such persons), such termination shall constitute a taxable termination with respect to such portion of the trust property.” (16) Paragraph (2) of section 2632(b) of the 1986 Code is amended by striking out “paragraph (1)) with respect to a prior direct skip” and inserting in lieu thereof “paragraph (1) with respect to a prior direct skip)”. (17) (A) Subsection (c) of section 2642 of the 1986 Code is amended to read as follows: “(c) Treatment of Certain Direct Skips Which Are Non-taxable Gifts.— “(1) In general.—In the case of a direct skip which is a nontaxable gift, the inclusion ratio shall be zero. “(2) Exception for certain transfers in trust.— Paragraph (1) shall not apply to any transfer to a trust for the benefit of an individual unless— “(A) during the life of such individual, no portion of the corpus or income of the trust may be distributed to (or for the benefit of) any person other than such individual, and “(B) if such individual dies before the trust is terminated, the assets of such trust will be includible in the gross estate of such individual. “(3) Nontaxable gift.— For purposes of this subsection, the term ‘nontaxable gift’ means any transfer of property to the extent such transfer is not treated as a taxable gift by reason of— “(A) section 2503(b) (taking into account the application of section 2513), or “(B) section 2503(e).” (B) Paragraph (1) of section 2642(d) of the 1986 Code is amended by striking out “(other than a nontaxable gift)”. 102 STAT. 3567 (C) The amendments made by this paragraph shall apply to transfers after March 31, 1988. (18) Clause (i) of section 2642(d)(2)(B) of the 1986 Code is amended to read as follows: “(i) the value of the property involved in such trans-fer reduced by the sum of— “(I) any Federal estate tax or state death tax actually recovered from the trust attributable to such property, and “(II) any charitable deduction allowed under section 2055 or 2522 with respect to such property, and”. (19) Paragraph (2) of section 2651(b) of the 1986 Code is amended by striking out “a spouse of the transferor” and inserting in lieu thereof “a spouse (or former spouse) of the transferor”. (20) Section 2652 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(d) Executor.—For purposes of this chapter, the term ‘executor’ has the meaning given such term by section 2203.” (h) Amendments Related to Section 1433 of the Reform Act.— (1) Subsection (a) of section 1433 of the Reform Act is amended by striking out “this part” and inserting in lieu thereof “this subtitle”. (2) Paragraph (2) of section 1433(b) of the Reform Act is amended— (A) by striking out “this part” in the material preceding subparagraph (A) and inserting in lieu thereof “this sub-title”, (B) by inserting before the comma at the end of subparagraph (A) the following: “(or out of income attributable to corpus so added)”, and (C) by inserting “or revocable trust” after “a will” in subparagraph (B). (3) (A) Subsection (b) of section 1433 of the Reform Act is amended by striking out paragraph (3) and inserting in lieu thereof the following new paragraphs: “(3) Treatment of certain transfers to grandchildren— “(A) In general.— For purposes of chapter 13 of the Internal Revenue Code of 1986, the term ‘direct skip’ shall not include any transfer before January 1, 1990, from a transferor to a grandchild of the transferor to the extent the aggregate transfers from such transferor to such grand-child do not exceed $2,000,000. “(B) Treatment of transfers in trust.— For purposes of subparagraph (A), a transfer in trust for the benefit of a grandchild shall be treated as a transfer to such grandchild if (and only if)— “(i) during the life of the grandchild, no portion of the corpus or income of the trust may be distributed to (or for the benefit of) any person other than such grandchild, “(ii) the assets of the trust will be includible in the gross estate of the grandchild if the grandchild dies before the trust is terminated, and “(iii) all of the income of the trust for periods after the grandchild has attained age 21 will be distributed 102 STAT. 3568to (or for the benefit of) such grandchild not less frequently than annually. “(C) Coordination with section 2653(a) of the 1986 code.—In the case of any transfer which would be a generation-skipping transfer but for subparagraph (A), the rules of section 2653(a) of the Internal Revenue Code of 1986 shall apply as if such transfer were a generation-skipping trans-fer. “(D) Coordination with taxable terminations and tax-able distributions.—For purposes of chapter 13 of the Internal Revenue Code of 1986, the terms ‘taxable termination’ and ‘taxable distribution’ shall not include any transfer which would be a direct skip but for subparagraph (A). (4) Definitions.—Terms used in this section shall have the same respective meanings as when used in chapter 13 of the Internal Revenue Code of 1986; except that section 2612(c)(2) of such Code shall not apply in determining whether an individual is a grandchild of the transferor.” (B) Clause (iii) of section 1443(b)(3)(B) of the Reform Act (as amended by subparagraph (A)) shall apply only to transfers after June 10, 1987. (4) Subsection (d) of section 1433 of the Reform Act is amended— (A) by striking out “shall be treated as a direct skip” and inserting in lieu thereof “shall be treated as a direct skip to such grandchild”, (B) by striking out “would be a direct skip” in subparagraph (B) and inserting in lieu thereof “would be a direct skip to a grandchild”, and (C) by adding at the end thereof the following new sentence: “Unless the grandchild otherwise directs by will, the estate of such grandchild shall be entitled to recover from the person receiving the property on the death of the grandchild any increase in Federal estate tax on the estate of the grandchild by reason of the preceding sentence.” (5) Subparagraph (C) of section 1433(b)(2) of the Reform Act shall not exempt any direct skip from the amendments made by subtitle D of title XIV of the Reform Act if— (A) such direct skip results from the application of section 2044 of the 1986 Code, and (B) such direct skip is attributable to property transferred to the trust after October 21, 1988.