... Transfers in trust.
A qualified interest is one that is in an easily valued form, such as an annuity or unitrust interest. This valuation rule applies to the following types of transactions. * Transfers in trust, including grantor retained income trusts (GRITs): Prop. Regs. Sec. 25.2702-2(a)(2) provides that a transfer in trust includes a transfer to a new or existing trust, or an assignment of an interest in an existing trust. Not included are the exercise of a nongeneral power of appointment or the execution of a qualified disclaimer. * A transfer of property that has one or more term interests: Term interest means a life interest or a term of years. * Joint purchases of property by family members and sales of remainder interest: The requirement that the retained interest (for instance, the income interest in a GRIT) be a qualified interest annuity/unitrust payout) will reduce the benefit of these types of transactions. The favorable valuation assumptions, produced by Sec. 7520's use of 120% of the midterm applicable federal rate (AFR) in connection with low-income producing property, will no longer be available. Example 1: In October 1991, father F makes a transfer worth $100,000 in a personal residence GRIT for 10 years that qualifies under the new rules. The applicable Sec. 7520 rate for October 1991 is 9.0%. IRS Publication 1457 provides in Table B that, at this interest rate, the following factors apply for a 10-year term interest.
Income interest: 0.577589
Thus, F's retained interest would be valued at $57,758.90 and the transferred interest would be valued at $42,241.10. This is the same result as could have been obtained from a transfer of cash to a GRIT under pre-Chapter 14 rules.
On the other hand, if F transfers $100,000 into a grantor retained annuity trust (GRAT) for 10 years and retains an 8% annuity ($8,000), the value of the transferred interest is significantly greater. The annuity interest would be valued at $51,341.60 (6.4177 x $8,000) and the transferred interest would be valued at $48,658.40 ($100,000 -- $51,341.601. Consequently, the gift tax associated with this higher value would be greater and the cash transaction is not as attractive as under pre-Chapter 14 rules.
A joint purchase involving property with one or more term interests by members of the same family is treated as an acquisition of the entire property by the holder of the term interest, followed by a transfer of the remainder interest. The transfer will be treated as made in exchange for any consideration provided by the other family member for the acquisition of an interest in the property. Example 2: Mother M purchases a 15-year term interest in a rental property and son S buys the remainder interest. The property's fair market value is $100,000 and the price for each interest is determined under Sec. 7520. M's interest is not a qualified interest; consequently, its value is zero. The amount of the gift to S is $100,000 less the purchase price supplied by S.
There are certain exceptions to these rules, including a qualified personal residence trust, in which all the property consists of a residence to be used as a personal residence by persons holding the term interests.
Prop. Regs. Sec. 25.2702-5(c) defines a personal residence as the principal residence of the term holder (within the meaning of Sec. 1034), one other residence of the term holder (within the meaning of Sec. 280A(d)(1)), or an undivided interest in either. According to the proposed regulations, a personal residence does not include its household furnishings, but the presence of a mortgage affect its personal residence status. Example 3: Father F owns a beach house that he rents out during the summer. It is treated as F's residence under Sec. 280A(d)(1) because he occupies it during the winter months. F transfers the beach house to an irrevocable trust and retains a 10-year term interest. This trust would be treated as a qualified personal residence trust.
Other exceptions include incomplete gifts, transfers to charitable trusts and transfers to pooled income funds.
Prop. Regs. Sec. 25.2702-6 provides that an individual's aggregate taxable gifts (or adjusted taxable gift for testamentary transfers) may be reduced if the individual transfers an interest in trust that was previously valued under Sec. 2702 and was other than a qualified interest. The reduction is the lesser of the increase in the individual's taxable gift resulting from the application of Sec. 2702 or the increase in the individual's taxable gifts (or gross estate) resulting from the interest's subsequent transfer. Prop. Regs. Sec. 25.2702-6(b)(2) provides that, in case of subsequent transfers the gift tax annual exclusion applies first to transfers other than the interest previously valued under Sec. 2702.
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|Author:||Gardner, John C.|
|Publication:||The Tax Adviser|
|Date:||Apr 1, 1992|
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