Nikki Marie Oliveira, Esq., LL.M., Margolis & Bloom, LLP
On November 8, 2011, the IRS published T.D. 9555, final regulations regarding the includibility of property (regardless of whether held in trust) in the grantor’s gross estate under I.R.C. § 2036 where the grantor retained:
(1) the use of the property;
(2) the right to an annuity or unitrust;
(3) a graduated retained interest; or
(4) other payment from the property
in any event, for:
(B) any period not ascertainable without reference to the grantor’s death; or
(C) a period that does not in fact end before the grantor’s death.
The final regulations amend Treas. Reg. § 20.2036-1 and fine tune proposed regulations published in the Federal Register on April 30, 2009. The final regulations are generally effective as of November 8, 2011 and affect estates filing a federal estate tax return.
Grantor’s retained annuity or unitrust. The final regulations describe how to determine the portion of trust corpus that is includible in the grantor’s gross estate where the grantor retained an annuity or unitrust. The amount includible is the amount of trust corpus required to generate sufficient income to satisfy the retained interest.
Grantor’s retained annuity following another person’s current annuity interest. The final regulations describe how to determine the portion of trust corpus that is includible in the grantor’s gross estate where the grantor was to receive an annuity after the death of the current recipient of the annuity. The amount includible in the grantor’s gross estate is the greater of (1) the amount of trust corpus required to generate sufficient income to pay the annuity or unitrust payable to the grantor as of the date of death, or (2) amount of corpus required to produce sufficient income to satisfy the annuity or other payment the grantor would have been entitled to receive if the grantor had survived the current recipient, reduced by the present value of the current recipient’s interest. The maximum includible value is the fair market value of the trust corpus at the grantor’s death.
Grantor’s graduated retained interest. The final regulations define a graduated retained interest as the grantor’s reservation of a right to receive an annuity, unitrust or other payment that increases over a period of time, and provide an example of how to calculate the extent to which trust corpus is includible in the grantor’s gross estate where the grantor retained a graduated retained interest.
Grantor and child share equal income or annuity interests. The final regulations clarify the extent to which the value of trust corpus is includible in the grantor’s gross estate where income is payable to the grantor and his child in equal shares while they are both living, and then to the survivor of them. In summary, if the grantor dies first, the present value of the surviving child’s life estate reduces only the half of the trust corpus from which it is payable. One half of the value of the trust corpus is includible in the grantor’s estate because of his right to receive one half of the trust income for life. The value of the remaining one half of trust corpus less the present value of the child’s outstanding life estate in the child’s half is also includible in the grantor’s estate because the grantor had the right to receive all the trust income if he had survived the child. Alternatively, if the grantor survived the child, the entire trust corpus would be includible in the grantor’s gross estate.
The final regulations also provide an example calculating the portion of the trust corpus includible in the grantor’s estate where the grantor and his child held annuity interests rather than trust income.
No double inclusion under §§ 2033 and 2036. The final regulations resolve the issue of whether I.R.C. §§ 2033 and 2036 might cause an asset to be subject to “double inclusion” in a particular circumstance. Specifically, if a grantor retains an interest for a term of years, dies before the term expires, and payments become payable to his estate for the balance of the term, those amounts payable to the estate after the grantor’s death are not includible in the grantor’s gross estate under § 2033 because they are already reflected in the value of the trust corpus and are includible under § 2036. Conversely, if the payments are payable to the grantor prior to death, but not actually paid until after death, those amounts are includible under § 2033.