IRS GRAT ruling raises planning concerns.
The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. has issued Letter Ruling (TAM) 9604005, which calls into question a technique that has been used to make payments out of grantor An individual who conveys or transfers ownership of property.
In real property law, an individual who sells land is known as the grantor.
grantor n. retained annuity annuity: see insurance.
Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. trusts (GRATs) when there is not sufficient cash to meet the obligation. Notes have been used to make the required annual annuity payments rather than distributing property out of the GRAT GRAT Grantor Retained Annuity Trust . The TAM concludes that the GRATs that were the subject of the ruling did not meet the requirements of Sec. 2702 because the annuity payments were to be made with funds borrowed from the grantors.
A GRAT is a grantor trust Grantor trust
A mechanism of issuing MBS wherein the mortgages' collateral is deposited with a trustee under a custodial or trust agreement. in which the grantor transfers property and retains a qualified interest in the property. This retained income interest, in the form of a fixed annual annuity payment, results in a lesser gift tax value for the remainder interest. Sec. 2702 and the regulations thereunder require that the payments must be a qualified annuity interest. Regs. Sec. 25.2702-3 (b) (1) sets forth the requirements that must be satisfied in order for an interest to be a qualified annuity interest. A qualified annuity interest is the right to receive a fixed amount. The annuity amount must be payable to or for the benefit of the holder of the annuity interest for each tax year of the term. A fixed amount means either a stated dollar amount payable periodically (but not less frequently than annually) or a fixed fraction or percentage of the property's initial fair market value.
The Service took the position that qualified interests were not present "in substance" because they could not be readily valued, and because the retained right was essentially the right to receive notes that were neither fixed amounts nor annual payments. The IRS reached these conclusions even though the form of the trusts was entirely consistent with the requirements of Sec. 2702. The Service concluded that the facts indicated that the parties to the transaction anticipated that the GRATs would not have sufficient cash flow to pay the annuities and that the loan mechanism would be implemented to pay the annuities.
This ruling is of particular concern to GRATs funded with interests such as shares of closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people.
In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. corporate stock that have a history of paying little or no dividends. It is also of concern in the case of short-term Short-term
Any investments with a maturity of one year or less.
1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. , high-payout GRATs in which the annuity amount cannot normally be satisfied with income.