Inclusion of certain trusts in a decedent's gross estate under Sec. 2036.
The purpose of this article is to examine the new final and proposed regulations under Sec. 2036 to gain an understanding of how to calculate the portion of a CRT or GRIT that must be included in a decedent's gross estate. This article discusses issues related to the new final and proposed regulations and provides comprehensive examples showing how they are applied to a variety of trust arrangements.
Sec. 2036: Transfers with a Retained Life Estate
Sec. 2036(a) requires that a decedent's gross estate must include the value of property transferred by trust, or otherwise, in which the decedent retains the right to income from the property or possession or enjoyment of the property. For Sec. 2036(a) to apply the decedent must retain this right for life, for any period not ascertainable without reference to his death, or for any period that does not, in fact, end before his death. For instance, if an individual sets up a trust prior to his death that pays all its income to him for 10 years and he dies only 5 years after creating the trust, Sec. 2036(a) requires that the entire value of the trust be included in his gross estate. The determination of what portion of the trust must be included in a decedent's gross estate quickly becomes more complex where the amount of income paid to the grantor of the trust is a fixed annuity, a fixed percent of the value of the trust (unitrust), or an annuity that changes in amount over time, or where there is a another beneficiary of the trust income. These are the issues addressed by the new final and proposed regulations.
Trusts Covered by Regs. Sec. 20.2036-1
Regs. Sec. 20.2036-1 (c)(2)(i), as amended by T.D. 9414, clarifies that Sec. 2036 alone covers the inclusion and valuation of two types of grantor trusts in a decedent's gross estate: charitable remainder trusts and grantor retained income trusts. Prior to this amendment the IRS had argued that at least some of these trusts might also be covered by Sec. 2039, which covers the inclusion of annuities in a decedent's gross estate. (3) This would be unfortunate for taxpayers because Sec. 2039 always requires the inclusion of the annuity's entire corpus in the decedent's gross estate. T.D. 9414 also added Regs. Sec. 20.2039-1 (e), which specifically states that Sec. 2039 will not be applied to CRTs and GRITs covered by Sec. 2036.
As mentioned above, one of the types of trusts covered by the new Regs. Sec. 20.2036-1 is the charitable remainder trust described in Sec. 664. CRTs are normally created to provide the grantor with a charitable contribution deduction amounting to the value of the remainder interest at the time assets are transferred to the trust while continuing to receive income from the assets during his or her life. The value of the remainder interest is calculated using present value concepts and the required interest rate under Sec. 7520 at the time of the donation. The grantor retains an income interest in the trust that is either for life or for a fixed period of years. At the grantor's death or the end of the fixed period of years, the trust corpus is distributed to a charitable organization.
The income payable to the grantor can be set up in one of two possible arrangements. In a qualified charitable remainder annuity trust (CRAT), described in Sec. 664(d)(1), the payment to the grantor is a fixed amount. The fixed payment is made to the donor independent of the value of the assets remaining in the trust. The second arrangement is a qualified charitable remainder unitrust (CRUT), described in Sec. 664(d)(2), and is a more popular form of charitable remainder trust than a CRAT. (4) In this arrangement the payment to the grantor is a fixed percentage of the trust value, determined annually. (5) The regulations apply to all CRT arrangements, even those that for some reason are not qualified CRATs or CRUTs.
The other trust arrangements covered by the new Regs. Sec. 20.2036-1 are grantor retained interest trusts. Generally, taxpayers form GRITs, described in Sec. 2702, for estate planning purposes. The grantor of the trust contributes property to the trust; he or she typically retains an income interest in the trust for a set period of years and gifts the remainder interest to his or her heirs. The value of the remainder interest, calculated at the time the property is placed in the trust, is subject to gift tax. If the grantor of the GRIT outlives the period covered by the income interest, any remaining trust corpus passes to his or her heirs free of any further estate or gift tax.
This may sound risky, but the downside is small. If the grantor had not set up the GRIT, the property would have been included in the estate anyway. Therefore, if the grantor outlives the term there is an estate tax savings, but dying during the term has as its only downside the cost of establishing and maintaining the trust. If the trust corpus comes back into the grantor's estate, the earlier gift disappears as an adjusted taxable gift for estate tax purposes.
Just as with CRTs, qualified GRITs come in two basic varieties. A grantor retained annuity trust (GRAT) provides the donor with a fixed annuity payment. A grantor retained unitrust (GRUT) provides the donor with a payment equal to a percentage of the trust's value, determined annually. Even GRITS that are not qualified GRATs or GRUTs are covered by Regs. Sec. 20.2036-1.
Qualified personal residence trusts (QPRTs) and personal residence trusts (PRTs) are other special forms of a GRIT. In a QPRT or a PRT, the grantor of the trust transfers his or her personal residence into the trust. The grantor is allowed to continue to live in the residence for a fixed period of years, after which the personal residence is transferred to his or her heirs. QPRTs and PRTs are created for the same estate tax planning reasons as GRATs and GRUTs. (6)
Regs. Sec. 20.2036-1
Prior to the issuance of amended Regs. Sec. 20.2036-1 in T.D. 9414, there was limited guidance available for calculating the portion of a grantor trust, with a retained life estate, that must be included in a decedent's estate. The main source of guidance came from two revenue rulings. New Regs. Sec. 20.2036-1 (c)(2) generally follows the old revenue rulings, but it significantly expands the explanations and examples of how the share of a trust's corpus that is includible in a decedent's gross estate is determined.
In general, the portion of a CRT or a GRIT included in the decedent's gross estate is the amount necessary to provide for the decedent's retained use or retained annuity, unitrust payment, or other amount without invading the principle. But the amount includible in the decedent's estate can never exceed the fair market value (FMV) of the trust's corpus at the decedent's date of death. These new final regulations are effective for the estates of decedents dying on or after July 14, 2008. (8)
Regs. Sec. 20.2036-1 (c)(2)(iii) provides detailed examples illustrating how the includible portion of the trust should be calculated for the three fundamental types of retained interest covered by these regulations. These three types are:
* Retained annuity interest;
* Retained income as a percentage of trust corpus (unitrust); and
* Retained right to trust income or use of trust property.
The following sections illustrate how the includible portion of the trust for each type of retained interest is calculated.
Retained Annuity Interest
Example (1): The first example in the regulations is a qualified CRAT. (9) Determining the portion of a CRAT includible in a decedent's gross estate is straightforward. In the example, D creates a CRAT in which the trust agreement provides an annuity of $7,500 to be paid each year on December 31 for D's life, then to his child (C) for C's life, with the remainder to be distributed upon the survivor's death to N, a qualified charitable organization. D dies in September 2006 and is survived by C, who is then age 40. On D's death, the value of the trust assets is $300,000 and the Sec. 7520 interest rate is 6%. D's executor does not elect to use the alternate valuation date.
The portion of the trust corpus includible in D's gross estate is that amount necessary to yield the annual annuity payment to D in perpetuity without reducing or invading the principal. In this case, the formula for determining the amount of corpus necessary to yield the annual annuity payment to D is:
Amount includible under Sec. 2036 = Annual annuity amount/Sec. 7520 interest rate
Sec. 7520(a) requires the use of an interest rate equal to 120% of the federal midterm rate in effect at the valuation date. Because there is a charitable contribution component for CRATs and CRUTs, Sec. 7520(a) allows taxpayers to instead elect to use 120% of the federal midterm rate for either of the two months preceding the valuation date.
The amount of corpus necessary to yield the annual annuity in Example (1) is $7,500 ./. 0.06 = $125,000. Therefore, $125,000 is includible in D's gross estate under Sec. 2036(a), and the remaining $175,000 value of the CRAT escapes estate taxation. The result would be the same if D had retained an interest in the CRAT for a term of years and had died during the term. The result would also be the same if D had irrevocably relinquished his annuity interest less than three years prior to his death because of the application of Sec. 2035.
In Example (1), as with all the examples in the regulations, the decedent's executor does not elect the Sec. 2032 alternate valuation date. When the IRS initially proposed the regulations in 2007, one commentator requested additional guidance on how making the alternate valuation date election would affect the trust's value and how annuity payments made after the date of death but before the alternate valuation date would affect the estate inclusion computation. The preamble to the final regulations states that if the alternate valuation date is elected, the appropriate Sec. 7520 interest rate is the one in effect on the alternate valuation date. But the issue of how payments made after the date of death but before the alternate valuation date should be treated is not addressed, leaving this issue unresolved. (10)
Example (2): Example (2) in the regulations illustrates the calculations for determining the portion of a GRAT that must be in included in a decedent's gross estate. (11) The calculation is the same as that for the CRAT, except that this example provides for monthly, rather than annual, payments. D transferred $100,000 to a qualified GRAT. The trust agreement provides for an annuity of $12,000 per year to be paid to D for a term of 10 years or until his earlier death. The annuity amount is payable in 12 equal installments at the end of each month. At the expiration of the term of years or on D's earlier death, the remainder is to be distributed to D's child, C. D dies prior to the expiration of the 10-year term. On the date of D's death, the value of the trust assets is $300,000 and the Sec. 7520 interest rate is 6%.
The amount of corpus includible in D's gross estate under Sec. 2036 is that amount of corpus necessary to yield the annual annuity payment to D without reducing or invading principal. The formula for determining the amount of corpus necessary to yield that annual payment is:
Amount includible under Sec. 2036 = [Annual annuity amount x adjustment factor/Sec. 7520 interest rate]
The adjustment factor is included in the formula to account for the fact that payments are made monthly rather than annually. The adjustment factor can be found in Table K in Regs. Sec. 20.2031-7(d)(6). (12) In this case, the amount from Table K is 1.0272, and the corpus necessary to yield the required annuity is ($12,000 x 1.0272) / 0.06 = $205,440. Therefore, $205,440 is includible in D's gross estate under Sec. 2036(a), which is less than the $300,000 total value of the trust at D's date of death.
If the trust agreement had instead provided that the annuity was to be paid to D during his life and to his estate for the balance of the 10-year term, if D died during that term then the portion of trust corpus includible in his gross estate would still be as calculated above. The discussion in the regulations of Example (2) states that it does not matter whether payments are made to D's estate after his death. The IRS added this explanation in the final regulations to address the issue of a Walton GRAT: (13) In the event of the grantor's death during the annuity term, the remaining annuity payments are payable to the grantor's estate. At least one commentator had been concerned that Walton GRATs were not specifically addressed when the regulations were proposed in 2007. (14)
Sec. 2036(a) contains an exception under which property, with a retained life estate, sold in a bona fide sale for full and adequate consideration need not be included in a decedent's gross estate. After the issuance of the proposed amendments to Regs. Sec. 20.2036-1 in 2007, some commentators suggested that "zeroed out" GRATs should not be subject to Sec. 2036. (15) In a zeroed-out GRAT, the annual annuity payments are set so high that the present value of the retained annuity equals the value of the GRAT assets at the time of contribution (i.e., the remainder interest has a present value of zero). The result is that there is no gift to the beneficiaries of the GRAT when it is created. Because the gift has no value, it has been suggested that the grantor has received full and adequate consideration for the assets contributed to the GRAT--i.e., a bona fide sale has taken place. (16)
In the preamble to the final regulations, the IRS and Treasury disagree with any assertion that a bona fide sale has taken place when assets are contributed to a zeroed-out GRAT:
There is a significant difference between the bona fide sale of property to a third party in exchange for an annuity, and the retention of an annuity interest in property transferred to a third party. In the bona fide sale, there is a negotiation and agreement between two parties, each of whom is the owner of a property interest before the sale; each uses his or her own property to provide consideration to the other in exchange for the property interest to be received from the other in the sale. When the transferor retains an annuity or similar interest in the transferred property (as in the case of a GRAT or GRUT), the transferor is not selling the transferred property to a third party in exchange for an annuity because there is no other owner of property negotiating or engaging in a sale transaction with the transferor. The transferor, instead, is transferring the property subject to a retained possession and enjoyment of, or right to, the income from the property. (17)
Retained Income as a Percentage of Trust Corpus (Unitrust)
Example (3): Where the retained income interest is based on a percentage of the value of the trust corpus, the calculation of the portion of the trust to be included in the estate requires several steps. This is illustrated in the third example in the regulations. In 2000, D created a qualifying CRUT. The trust instrument directs the trustee to pay to D for life, and then to D's child (C) for C's life, in equal quarterly installments payable at the end of each calendar quarter, an amount equal to 6% of the trust's FMV as valued on December 15 of the trust's prior tax year. (18) At the termination of the trust, the remainder is to be distributed to N, a qualifying charitable organization. D dies in 2006, survived by C, who is then age 55.
The amount of corpus includible in D's gross estate is the amount of corpus necessary to yield the unitrust payments in perpetuity. In this case, the includible amount of corpus is determined by comparing the trust's equivalent income interest rate with the Sec. 7520 rate (which was 6% at the time of D's death). To calculate the trust's equivalent income interest rate requires two steps. First, the adjusted payout rate must be determined. This adjustment takes into account the fact that the trust assets are valued at December 15, but the first quarterly payment based on that valuation is not made until March 31 of the following year. The adjustment factor is found in Table F (19) for 6% and is calculated as in Exhibit 1.
Exhibit 1: Calculation of adjusted payment rate
Adjusted payout rate = trust payout rate x Table F factor
For this example:
* Adjusted payout rate = 0.06 x .964365
* Adjusted payout rate = 0.05786, or 5.786%
The equivalent income interest rate is then determined by dividing the trust's adjusted payout rate by the excess of 1 over the adjusted payout rate. Thus, the equivalent income interest rate is calculated as follows:
Equivalent income interest rate = [[Adjusted payout rate] / [1 - adjusted payout rate]]
For this example:
* Equivalent income interest rate = 0.05786 / (1 - 0.05786)
* Equivalent income interest rate -0.06141, or 6.141%
The equivalent income interest rate is compared with the Sec. 7520 rate. In this case the ratio is 102.35% (6.141% ./.6%). Because this exceeds 100%, D's retained payout interest rate exceeds a full income interest in the trust, and D effectively retains the income from all the assets transferred to the trust. Accordingly, because D retains an interest at least equal to the right to all income from the property in the CRUT, the entire value of the corpus of the CRUT is includible in D's gross estate.
If instead D had retained the right to a unitrust equivalent income interest rate that was less than Sec. 7520's 6% assumed interest rate, a correspondingly reduced proportion of the trust corpus would be includible in D's gross estate. For instance, if the trust's equivalent income interest rate had been 5.1% instead of 6.141%, the ratio would have been 85% (5.1% / 6%), and 85% of the value of the trust would be included in D's gross estate. The results in Example (3) would be the same if the trust had been a GRUT instead of a CRUT.
Retained Right to Trust Income or Use of Trust Property
The last three examples in Regs. Sec. 20-2036-1 (c)(2)(iii) illustrate circumstances in which the grantor retains all the income from the trust property or the use of the property. In each example the entire trust corpus must be included in the decedent's gross estate. The situations described in the examples include:
* D established a 15-year GRIT for the benefit of individuals who are not members of the grantor's family. D retains the right to all the income from the GRIT. If D dies during the GRIT term, the GRIT's corpus is included in the estate. (20)
* D transferred money to a pooled income fund and receives all the income from the fund during his life. (21) At D's death, his child (C) receives the income from the fund for life. When D dies, the FMV of the pooled income fund is included in his gross estate. (22)
* D transferred his personal residence to a trust that met the requirements of a qualified personal residence trust (QPRT). D retained the right to use the residence for 10 years or until his prior death. D dies before the end of the term. In this case, the FMV of the QPRT's assets on the date of D's death are includible in his gross estate. (23) The amended regulations also provide an example in which D transfers his residence to his child (C) outside a trust but retains the right to use the residence for a term of years. Once again, if D dies during the term of his retained use, the FMV of the residence must be included in his gross estate. (24)
On April 30, 2009, the IRS proposed additional amendments to Regs. Sec. 20.2036-1. (25) These additional proposed amendments were based on comments that the IRS had received about the regulations issued on August 14, 2008, and provide additional guidance for two scenarios that are more sophisticated than those in the original set of examples. These two scenarios include:
* Trust arrangements where the grantor reserves the right to the income, annuity, or other payments after the death of another person who is currently receiving the payments from the trust at the time of the grantor's death; and
* GRATs in which the annuity interest retained by the grantor increases annually during the term of the trust (a graduated retained interest)
Grantor Reserves Right to Income Currently Paid to Another Person
The proposed regulations describe a scenario in which the grantor of the trust reserves the right to the income, annuity, or other payments after the death of another person who is currently receiving payments from the trust at the time of the grantor's death.26 If the decedent retained the right to receive an annuity or other payment after the death of the current recipient of that interest, the amount includible in the decedent's gross estate under the proposed regulations is the amount of trust corpus required to produce sufficient income to satisfy the entire annuity or other payment the decedent would have been entitled to receive if he or she had survived the current recipient, reduced by the present value of the current recipient's interest. But the amount includible can in no event exceed the value of the trust corpus on the date of death or be less than the amount of corpus necessary to produce the annuity or other payment to which the decedent was entitled at the time of the decedent's death.
The proposed regulations provide a set of six steps to complete the required calculation. The steps necessary for calculating the amount includible in the decedent's gross estate are illustrated here using the example in the proposed regulations. (27)
The example states that in 2001, D creates an irrevocable trust. The terms of the trust provide that an annuity of $10,000 per year is to be paid to D and C in equal shares during their joint lives (i.e., $5,000 each). On the death of the first to die of D and C, the entire $10,000 annuity is to be paid to the survivor for life. On D's date of death, the trust's FMV is $120,000 and the Sec. 7520 rate is 7%. On the death of the survivor of D and C, the remainder is to be paid to another individual, F. In 2009, D dies, survived by C. Assume that at the time of D's death, the present value of C's right to receive $5,000 annually for the remainder of her life is $40,000. The calculation of the amount includible in D's estate is as follows:
1. Determine the fair market value of the trust corpus at the date of death. In this example, the value is given as $120,000.
2. Determine the amount of corpus required to generate sufficient income to pay the annuity (or unitrust or other payment) to the decedent for the trust year in which the decedent's death occurred. In this example, D's annuity payment at the time of his death is one-half the $10,000 annuity payment, or $5,000. The amount of trust corpus required to produce that annuity would be $71,429 ($5,000 / 0.07).
This is the minimum portion of the trust's value that must be included in D's estate.
3. Determine the corpus required to generate sufficient income to pay the annuity (or unitrust or other payment) to the decedent, D, if D had survived C. In this example, the entire annuity amount is $10,000 and the trust corpus required to produce the annuity would be $142,857 ($10,000 / 0.07).
4. Determine the present value of C's interest at the time of D's death. This would be a present value calculation using C's expected lifespan and the current Sec. 7520 rate. In this example, the amount is given as $40,000.
5. Reduce the amount determined in step 3 by the amount determined in step 4, but not to below the amount determined in step 2. That is, take the total amount of the annuity (or unitrust or other payment) and reduce it by the present value of the amount currently paid to the other person. In this example, the amount is $102,857 ($142,857 - $40,000).
6. The amount includible in the decedent's gross estate is the lesser of the amounts determined in steps 5 and 1. In this example, the amount includible in D's gross estate is $102,857.
If one steps back from the details and looks at what is happening, the calculations make sense. The end result is that D must include the amount of trust corpus to produce his annuity of $5,000, or $71,429. D must also include the amount of trust corpus to produce C's annuity of $5,000--also $71,429--reduced by the present value of C's interest in her annuity, or $40,000. This amounts to $102,858 ($71,429 + $71,429 - $40,000), the same amount determined above (with a one-dollar difference due to rounding).
The example in the proposed regulations also discusses the result if D, the grantor of the trust, had the right to one-half the entire income from the trust, rather than one-half an annuity payment. In this case, if D predeceases C, he must include the entire trust corpus, reduced by the present value of C's life estate.
Graduated Retained Interest
A graduated retained interest is the grantor's reservation of a right to receive an annuity or unitrust payment, payable at least annually, that increases over a period of time but not more often than annually.
The proposed regulations require a two-stage process for determining the portion of a graduated retained interest includible in a decedent's gross estate. First, an amount is calculated using the income in the year of the decedent's death. This amount is determined using the calculations already illustrated in final Regs. Sec. 20.2036-1 above, and the amount resulting from this calculation is called the base amount. The second step requires calculating the present value of the amount necessary to generate an amount of income sufficient to pay any increased payment, called the periodic addition, beginning in the increase year and continuing in perpetuity, without reducing or invading principal. This calculation must be repeated for each year in which the payment increases over the prior year. The concept of the calculation is straightforward, but the actual calculation is burdensome if the trust document calls for many increases in the payment over time.
The amount includible in the gross estate is the sum of the base amount and the additional corpus amounts calculated for each year for which a periodic addition is first payable. The sum of these amounts represents the amount of trust principal that would be necessary to generate the annual payments that would have been paid to the decedent if the decedent had survived and had continued to receive the graduated retained interest. But the amount of trust corpus includible in a decedent's gross estate cannot exceed the FMV of the trust corpus on the decedent's date of death.
An example is included in the proposed regulations to illustrate the calculations.
On November 1, year N, D transfers assets valued at $2 million to a GRAT. Under the terms of the GRAT, the trustee is to pay D an annuity for a five-year term. The annuity amount is to be paid annually at the end of each trust year, on October 31. The first annual payment will be $100,000. Each succeeding payment will be 120% of the amount paid in the preceding year. If D dies during the five-year term, the payments are to be made to D's estate for the balance of the GRAT term. At the end of the five-year term, the trust is to terminate and the corpus is to be distributed to C, D's child. D dies on January 31 of the third year of the GRAT term. On the date of D's death, the value of the trust corpus is $3,200,000 and the Sec. 7520 interest rate is 6.8%. (28) See Exhibit 2 for the calculations.
Exhibit 2: Calculation of adjusted corpus amounts A 20% annual increase in the payment results in the following payments for years 3,4, and 5: (1) (2) (1-2) Annual Prior-year) Periodic payment ($) payment ($ addition ($) Year 3 144,000 120,000 24,000 Year 4 172,800 144,000 28,800 Year 5 207,360 172,800 34,560
Year 3 calculation:
The base amount is calculated using the annuity payment in the year of death as follows:
Amount includible under Sec. 2036 = [Annual annuity amount / Sec. 7520 interest rate]
For this example:
* $144,000 ./. 0.068 = $2,117,647
* Base amount = $2,117,647
To determine the amount includible in the gross estate from periodic additions in years after the year of death, the proposed regulations provide the following formula:
Additional corpus = [(Periodic addition x adjustment factor) / Sec. 7520 rate] x [1 / (1 + Sec. 7520rate)] (T)
adjustment factor = the factor for payments made more frequently than annually and for payments due at the beginning, rather than the end, of a calendar period. (See Table K or J in Regs. Sec. 20.2031-7(d)(6).) *
T = the time period in years from the date of death through the last day of the trust year immediately before the year for which the periodic addition is first payable. Partial years must be included.
Year 4 calculation:
T = (February 1, year 3-October 31, year 3) / 365
T = (273 days) / 365
T = 0.747945
Additional corpus = (28,800 / .068) x (1 / [(1 + .068).sup.0.747945])
Additional corpus = $423,529 x 0.951985 = $403,193
Year 5 calculation:
T = (February 1, year 3-October 31, year 4) / 365
T = 638 days / 365
Additional corpus = (34,560 / .068) x (1 / [(1 + .068).sup.1.747045])
Additional corpus = $508,235 x 0.891372 = $453,026
The total portion of the GRAT includible in D's estate is the sum of the base amount and the additional corpus for years 4 and 5.
Amount includible in D's estate = $2,117,647 + $403,193 + $453,026 = $2,973,866
* Table J, Adjustment Factors for Term Certain Annuities Payable at the Beginning of Interval, adjusts for annuity payments at the beginning of a period, rather than at the end of a period.
D would include $2,973,866 in his gross estate. Because the total value of the GRAT is $3,200,000 at D's date of death, $226,134 escapes inclusion in his gross estate.
In this example, the payments are made annually at the end of each trust year so the adjustment factor is one. In addition, calculations for additional corpus must be made for only two years because the GRAT's life is short. For a GRAT with a graduated retained interest and a longer life, the calculation of additional corpus would need to be made for each of the remaining years.
The proposed regulations also indicate that the result would be the same in the example above whether D's retained annuity was payable to D for a term of five years or until D's prior death, at which time the GRAT would have terminated and the trust corpus would have become payable to another.
The amendments to Regs. Sec. 20.2036-1 issued in July 2008 provided much-needed guidance in determining the portion of the value of CRTs and GRITs includible in a decedent's gross estate. With the exception of issues related to the election to use the special valuation date under Sec. 2032, the proposed regulations issued in April 2009 appear to answer most of the questions that were left unanswered in the amended regulations. Although the calculations can be burdensome, they are consistent with older revenue rulings addressing the valuation issue. A careful reading of the examples in the new and proposed regulations will provide practitioners with detailed information about how to make these calculations.
(1) T.D. 9414, 73 Fed. Reg. 40173 (July 14, 2008).
(2) REG-1 19532-08, 74 Fed. Reg. 19913 (April 30, 2009).
(3) For instance, see Technical Advice Memorandum 200210009 (3/08/02) and IRS Letter Ruling 9345035 (8/13/93).
(4) See IRS statistics for split-interest trusts at www.irs.gov.
(5) For an overview of charitable remainder trusts, see Callister, "Charitable Remainder Trusts: An Overview," 51 Tax Law. 549 (1.998); and Klemik and Koebn, "Tax Planning Strategies Using Charitable Remainder Trusts," 47 Hafl Pub. Accountant 6 (2002).
(6) QPRTs and PRTs are defined in Regs. Sees. 25.2702-5(b) and (c). For an overview of QPRTs see King, "The ABCs of QPRTs," 202 journal of Accountancy 53 (2006).
(7) See Rev. Rul. 76-273, 1976-2 C.B. 268; and Rev. Rul. 82-105, 1982-1, C.B. 133.
(8) Regs. Sec. 20.2036-1(c)(3).
(9) Regs. Sec. 20.2036-l(c)(2)(iii), Example (1).
(10) T.D. 9414.
(11) Regs. Sec. 20.2036-1(c)(2)(iii), Example (2).
(12) See IRS Publication 1457, Actuarial Values (Book Aleph) (1999), Table K, Adjustment Factors for Annuities Payable at the End of Each Interval.
(13) See Walton, 115 T.C. 589 (2000).
(14) See Gans and Blattmachr, "Treatment of GRATs Under the Section 2036 Proposed Regulations--Questions Remain," 107 J. Tax'n 143 (2007).
(16) For a discussion of zeroed-out GRATs, see Boffa and Bakale, "When to Use a 'Zeroed Out' GRAT," 35 The Tax Adviser 474 (2004).
(17) T.D. 9414.
(18) Regs. Sec. 20. 2036-1 (c) (2) (iii), Example (3).
(19) Regs. Sec. 1.664-4 (e) (6). Table F, Payout Adjustment Factors, can also be found in IRS Publication 1458, Actuarial Values (Book Beth) (1999).
(20) Regs. Sec. 20. 2036-1 (c) (2) (iii), Example (4).
(21) Pooled income funds are described in Sec. 642 (c) (5).
(22) Regs. Sec. 20.2036-1(c) (2) (iii), Example (5).
(23) Regs. Sec. 20.2036-1 (c) (2) (iii), Example (6).
(24) Regs. Sec. 20.2036-1(c) (1) (iii), Example (2).
(26) Prop. Regs. Sec. 20.2036-1 (b) (1) (ii).
(27) Prop. Regs. Sec. 20.2036-1 (c) (1) (ii), Example (1).
(28) Prop. Regs. Sec. 20-2036-1 (c) (2) (iii), Example (7).
RELATED ARTICLE: EXECUTIVE SUMMARY
* Sec. 2036 requires the inclusion in a decedent's estate of the value of property in which the decedent retained a lifetime income interest or the right to the possession or enjoyment of the property.
* The IRS issued final regulations in 2008 that specify that only Sec. 2036 applies to two types of transfers with retained interests--charitable remainertrusts (CRTs) and grantor retained income trusts (GRITs). The regulations also provide the rules on and examples of how to calculate the portion of a CRT or a GRIT that is included in the decedent's estate.
* Proposed regulations the IRS issued in 2009 provide rules and examples for the calculation of the amount includible in the estate of a decedent that made a transfer reserving the right to the income, annuity, or other payments after the death of another person who is receiving the payments at the time of the decedent's death or a transfer with a graduated retained interest.
By: Kenton D. Swift, Ph.D., CPA
Kenton Swift is an associate professor at the University of Montana in Missoula, MT For more information about this article, contact Prof. Swift at email@example.com.
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|Author:||Swift, Kenton D.|
|Publication:||The Tax Adviser|
|Date:||Feb 1, 2010|
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