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Chapter 14 "curve ball." (Brief Article)

Internal Revenue Code Chapter 14's special valuation rules for transfer tax purposes introduce a grantor retained annuity trust (GRAT) and unitrust (GRUT) to replace the prior law's grantor retained income trust (GRIT). The new rules affecting these trusts fare similar to those governing charitable remainder annuity trusts and unitrusts.

Under Sec. 2702, a reduction in the total value of a transfer is allowed only for the value of a "qualified" retained income interest which must be either a GRAT or a GRUT. Under Regs. Sec. 25.2702-3(d)(3), the term of such an interest must be the shorter of the term holder's (the grantor's) life or a specified number of years.

Despite this specific provision allowing a retained income interest to exist only for a specified number of years, Regs. Sec. 25.2702-3(e), Example 5, throws the taxpayer "a curve" by requiring a GRUT to be valued at the lower of - the GRUT's term; or - the right to receive the GRUT payment until the grantor's prior death.

Under the previously proposed version of this example, a deduction was allowed for the GRUT'S value for its full term, without any reduction for the contingency of the grantor's death during the GRUT's term.

Under the final version of this example, the qualified interest will be measured by the value of the right to receive annuity payments for only the shorter of the fixed term or the grantor's prior death - even though the income payments would continue to be paid to the grantor's estate if he dies during the trust's term (as illustrated in Example 5). This change was not discussed in the final regulations' preamble. (See TD 8395.)

The change will substantially affect GRAT and GRUT computations, particularly for an older grantor. The table above shows the maximum transfer to a GRAT that could be covered by the unified credit.

While it may be questionable whether this was the final regulations' intent, it most certainly is their result.

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Article Details
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Author:Rhine, David S.
Publication:The Tax Adviser
Article Type:Brief Article
Date:May 1, 1993
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