Section 2036-Graduated Retained Interests, 19913-19917 [E9-10003]
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Federal Register / Vol. 74, No. 82 / Thursday, April 30, 2009 / Proposed Rules
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. E9–9808 Filed 4–29–09: 8:45 am]
BILLING CODE 6750–01–S
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[REG–119532–08]
RIN 1545–BH94
Section 2036—Graduated Retained
Interests
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations that provide
guidance on the portion of trust
property includible in the grantor’s
gross estate if the grantor has retained
the use of the property, the right to an
annuity, unitrust, graduated retained
interest, or other payment from such
property for life, for any period not
ascertainable without reference to the
grantor’s death, or for a period that does
not in fact end before the grantor’s
death. The proposed regulations will
affect estates that file Form 706, United
States Estate (and Generation-Skipping
Transfer) Tax Return.
DATES: Written or electronic comments
and requests for a public hearing must
be received by July 29, 2009.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–119532–08),
Internal Revenue Service, Room 5203,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–119532–
08), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC 20224; or sent
electronically via the Federal
eRulemaking Portal at https://
www.regulations.gov (IRS REG–119532–
08).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Theresa M. Melchiorre, at (202) 622–
3090; concerning submissions of
comments or to request a hearing,
Richard A. Hurst at Richard.A.Hurst
@irscounsel.treas.gov or (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
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Background
On June 7, 2007, proposed regulations
(REG–119097–05) were published in the
Federal Register [72 FR 31487]
providing guidance on the portion of
trust corpus properly includible in a
grantor’s gross estate under sections
2036 and 2039. The IRS and Treasury
Department determined that certain
comments received in response to the
proposed regulations should be
addressed in a separate notice of
proposed rulemaking, instead of in the
final regulations published on July 14,
2008 [73 FR 40173], as TD 9414.
Accordingly, this notice of proposed
rulemaking proposes additional changes
to the regulations in response to those
comments.
The proposed regulations (REG–
119097–05) addressed the amount
includible in the gross estate under
sections 2036 and 2039 if the grantor
retains the right to receive an annuity,
unitrust, or other payment from a trust
for life, for any period not ascertainable
without reference to the grantor’s death,
or for a period that does not in fact end
before the grantor’s death. The trusts
that were the subject of the proposed
regulations included grantor retained
interest trusts (GRTs), such as grantor
retained income trusts (GRITs), grantor
retained annuity trusts (GRATs) and
grantor retained unitrusts (GRUTs)
described in section 2702, whether or
not the grantor’s retained interest was a
‘‘qualified interest’’ under section
2702(b), as well as other trust forms,
including charitable remainder trusts
(CRTs), such as charitable remainder
unitrusts (CRUTs) and charitable
remainder annuity trusts (CRATs)
described in section 664 whether or not
the trust met the qualifications of
section 664(d)(1), (2), or (3). The
proposed regulations incorporated the
methodology provided in Rev. Rul. 76–
273, 1976–2 C.B. 268, and Rev. Rul. 82–
105, 1982–1 C.B. 133. See
§ 601.601(d)(2)(ii)(b). Under this
methodology, the portion of the corpus
of a GRT or a CRT includible in the
decedent’s gross estate under section
2036 is that portion of the trust corpus
necessary to generate a return sufficient
to pay the decedent’s retained annuity,
unitrust, or other payment.
One commentator suggested that the
regulations address the portion of trust
corpus of a GRAT includible in the
grantor’s gross estate under section 2036
if the deceased grantor retains an
interest described in § 25.2702–
3(b)(1)(ii)(A); that is, the annuity
interest retained by the grantor increases
annually during the term of the trust (a
graduated retained interest). The
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19913
commentator suggested two possible
methods for determining the portion of
GRAT corpus includible in the grantor’s
gross estate if the grantor dies during the
term of such a GRAT.
Another commentator questioned the
result in the example contained in
§ 20.2036–1(c)(1)(ii) of the proposed
regulations. This example considered
the situation where the decedent (D)
creates an irrevocable inter vivos trust,
under the terms of which all trust
income is to be paid to D and E, D’s
spouse, in equal shares during their
joint lives and, on the death of the first
to die of D and E, all trust income is to
be paid to the survivor. On the death of
the survivor of D and E, the remainder
is to be paid to another individual, F. D
dies survived by E. The example
concludes that, because D retained the
right to receive 50 percent of the trust
income for a period that did not in fact
end before D’s death, 50 percent of the
trust’s corpus is includible in D’s gross
estate under section 2036. The example
also concludes that, if instead E had
predeceased D, D would have died
while entitled to all of the income from
the trust, so that the entire trust corpus
would have been includible in D’s gross
estate under section 2036.
The commentator noted that, because
E is identified as D’s spouse, the
example unnecessarily raises issues
under section 2523 (gift tax marital
deduction). In addition, the
commentator opined that, under the
facts presented, D has retained the right
to receive one-half of trust income
during the joint lives of D and E, and the
right to receive 100 percent of the trust
income if D survives E. Thus, 50 percent
of the trust corpus is includible in D’s
gross estate by virtue of D’s retained
right to receive 50 percent of the trust
income during D’s life, and the
remaining 50 percent of the trust corpus
(reduced by the actuarial value of E’s
income interest) is includible in D’s
gross estate under section 2036 by virtue
of D’s retained right to receive all of the
trust income provided D survives E.
Explanation of Provisions
In response to the comments, these
proposed regulations provide the
method to be used to determine the
portion of trust corpus includible in the
grantor’s gross estate if the grantor
reserves a graduated retained interest in
a trust. This method applies to
graduated retained interests in property
whether or not the property is held in
trust.
The portion of the corpus of a GRT or
a CRT includible in the decedent’s gross
estate under section 2036 is that portion
of the trust corpus necessary to generate
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a return sufficient to pay the decedent’s
retained annuity, unitrust, or other
payment. Consistent with this approach,
the proposed methodology measures the
amount of corpus needed to generate
sufficient income to produce the
payments that would have been due
even after the decedent’s death, as if the
decedent had survived and continued to
receive the retained interest. Thus,
under the proposed methodology, the
amount of corpus necessary to produce
the retained graduated interest is the
sum of the following amounts: (1) The
amount of corpus required to generate
sufficient income to pay, without
reducing or invading principal, the
annual amount payable to the decedent
at the decedent’s death calculated
pursuant to § 20.2036–1(c)(2)(i); and (2)
for each succeeding year of the trust, the
amount of corpus required to generate
sufficient income to pay, without
reducing or invading principal, the
increase (if any) in the annuity, unitrust,
or other payment for that year, deferred
until the beginning date of that increase.
The formula to be applied in calculating
the corpus for each such succeeding
year of the trust is the product of two
factors: the first is the result of dividing
the periodic addition (adjusted for
payments made more frequently than
annually, if applicable, and for
payments due at the beginning, rather
than the end, of a payment period (See
Table K or J of § 20.2031–7(d)(6)) by the
section 7520 rate (periodic addition/
rate); and the second is 1 divided by the
sum of 1 and the section 7520 rate
raised to the T power (1/(1 + rate)∧T).
For purposes of this formula, T is the
time (expressed in years or a portion of
a year) between the date of the
decedent’s death and the first day of the
trust’s first year for which the periodic
addition is payable. The periodic
addition for each year after the year in
which the decedent’s death occurs is the
amount (if any) by which the annuity,
unitrust, or other payment that would
have been payable for that year (if the
decedent had survived) exceeds the
total amount of payments for the year
immediately preceding that year,
provided that payments increase (and
do not ever decrease). This formula
would be:
(Periodic Addition) × (Adjustment Factor)
1
×
Section 7520 Rate
(1+Section 7520 Rate)T
The proposed regulations also add
§ 20.2036–1(c)(2)(iii), Example 7,
illustrating this computation.
In addition, in response to the
comments, § 20.2036–1(c)(1)(ii),
Example 1 (which was reserved in the
final regulations REG–119097–05 (TD
9414)) is added. In this example, trust
income is payable to D and C, D’s child,
in equal shares during their joint lives
and, on the death of the first to die of
D and C, all trust income is to be paid
to the survivor. The example concludes
that, if D dies before C, 100 percent of
the trust corpus, reduced by the present
value of C’s life interest, is includible in
D’s gross estate under section 2036.
Fifty percent of the trust corpus is
includible in D’s gross estate because D
retained the right to receive 50 percent
of the trust’s income for life. The
remaining 50 percent of the trust corpus
(less the present value of C’s
outstanding life interest) is includible in
D’s gross estate because at D’s death D
retained the right to receive all of the
trust income if D survived C. This result
is consistent with § 20.2036–1(b)(1)(ii).
Finally, § 20.2036–1(b)(1)(ii) is
amended to clarify the computation of
the includible amount if the decedent
retained the right to receive an annuity
or other payment (rather than income)
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after the death of the current recipient
of that interest. Example 1 of § 20.2036–
1(c)(1)(ii) has been expanded to provide
an illustration of this computation. In
general, under this computation, the
amount includible is the portion of the
date of death value of the trust corpus
required to produce sufficient income to
satisfy the annuity or other payment the
decedent would have been entitled to
receive if the decedent had survived the
current recipient, reduced by the
present value of the current recipient’s
interest. However, the amount
includible shall not be less than the
amount of corpus required to produce
sufficient income to satisfy the annuity
or other payment the decedent was
entitled to receive for the trust’s year in
which the decedent’s death occurred. In
no event, however, shall the amount
includible exceed the value of the trust
corpus on the date of death.
Proposed Effective Date
All of § 20.2036–1(b)(1)(ii), the
introductory text of § 20.2036–1(c)(1)(ii),
Example 1 of § 20.2036–1(c)(1)(ii), all of
§ 20.2036–1(c)(2)(ii), and Example 7 of
§ 20.2036–1(c)(2)(iii) are applicable to
estates of decedents dying on or after
the date of publication in the Federal
Register of the Treasury decision
adopting these rules as final regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
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553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations and, because these
regulations do not impose on small
entities a collection of information
requirement, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the
Internal Revenue Code, this regulation
has been submitted to the Chief Counsel
for Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The IRS
and the Treasury Department also
request comments on the clarity of the
proposed regulations and how they may
be made easier to understand. All
comments will be available for public
inspection and copying. A public
hearing may be scheduled if requested
in writing by any person that timely
submits written comments to the IRS. If
a public hearing is scheduled, notice of
the date, time, and place for the hearing
will be published in the Federal
Register.
Drafting Information
The principal author of these
regulations is Theresa M. Melchiorre,
Office of Associate Chief Counsel
(Passthroughs and Special Industries),
IRS.
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Where adjustment factor, if applicable, is
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 of § 20.2031–7(d)(6))
and T equals 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.
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List of Subjects in 26 CFR Part 20
Estate taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 20 is
proposed to be amended as follows:
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER AUGUST
16, 1954
Paragraph 1. The authority citation
for part 20 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2036–1 is amended
by:
1. Revising paragraph (b)(1)(ii) and
paragraph (c)(1)(ii) introductory text.
2. Adding paragraphs (c)(1)(ii)
Example 1, (c)(2)(ii), (c)(2)(iii) Example
7, and two sentences at the end of
paragraph (c)(3).
The revisions and additions read as
follows:
§ 20.2036–1
estate.
Transfers with retained life
*
*
*
*
*
(b) * * * (1) * * *
(ii) A decedent reserved the right to
receive the income, annuity, or other
payment from transferred property after
the death of another person who was in
fact enjoying the income, annuity, or
other payment at the time of the
decedent’s death. In such a case, the
amount to be included in the decedent’s
gross estate under this section does not
include the value of the outstanding
interest of the other person. If the other
person predeceased the decedent, the
reservation by the decedent may be
considered to be either for life, or for a
period which does not in fact end before
death. If the decedent retained the right
to receive an annuity or other payment
(rather than income) after the death of
the current recipient of that interest,
then the amount includible in the
decedent’s gross estate under section
2036 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 the decedent had
survived the current recipient (thus,
also including the portion of that entire
amount payable to the decedent before
the current recipient’s death), reduced
by the present value of the current
recipient’s interest. However, the
amount includible shall not be less than
the amount of corpus required to
produce sufficient income to satisfy the
annuity or other payment the decedent
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was entitled, at the time of the
decedent’s death, to receive for each
year. In no event, however, shall the
amount includible exceed the value of
the trust corpus on the date of death.
The following steps implement this
computation.
(A) Step 1: Determine the fair market
value of the trust corpus on the date of
death.
(B) Step 2: Determine, in accordance
with paragraph (c)(2)(i) of this section,
the amount of corpus required to
generate sufficient income to pay the
annuity, unitrust, or other payment
(determined on the date of the
decedent’s death) payable to the
decedent for the trust year in which the
decedent’s death occurred.
(C) Step 3: Determine, in accordance
with paragraph (c)(2)(i) of this section,
the amount of corpus required to
generate sufficient income to pay the
annuity, unitrust, or other payment that
the decedent would have been entitled
to receive for each trust year if the
decedent had survived the current
recipient.
(D) Step 4: Determine the present
value of the current recipient’s annuity,
unitrust, or other payment.
(E) Step 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.
(F) Step 6: The amount includible in
the decedent’s gross estate under section
2036 is the lesser of the amounts
determined in Step 5 and Step 1.
*
*
*
*
*
(c) * * * (1) * * *
(ii) Examples. The application of
paragraphs (b)(1)(ii) and (c)(1)(i) of this
section is illustrated in the following
examples:
Example 1. (i) In 2001, Decedent (D)
creates an irrevocable inter vivos trust. The
terms of the trust provide that all of the trust
income is to be paid to D and C, D’s child,
in equal shares during their joint lives and,
on the death of the first to die of D and C,
all of the trust income is to be paid to the
survivor. 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.
Fifty percent of the value of the trust corpus
is includible in D’s gross estate under section
2036(a)(1) because, under the terms of the
trust, D retained the right to receive one-half
of the trust income for D’s life. In addition,
the value of the remaining 50 percent of the
trust corpus, less the present value of C’s
outstanding life estate, also is includible in
D’s gross estate under section 2036(a)(1),
because D retained the right to receive all of
the trust income for such time as D survived
C. If C had predeceased D, then 100 percent
of the trust corpus would have been
includible in D’s gross estate.
(ii) Assume the same facts as above, except
that the trust provides that, rather than all the
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income, an annuity of $10,000 per year is to
be paid to D and C in equal shares during
their joint lives and, 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 fair market value of the
trust is $120,000 and the section 7520 rate is
7 percent. At the date of death, the amount
of trust corpus needed to produce D’s
annuity interest ($5,000 per year) is $71,429
($5,000/.07). In addition, assume the present
value of C’s right to receive $5,000 annually
for the remainder of C’s life is $40,000. The
portion of the trust corpus includible in D’s
gross estate under section 2036(a)(1) is
$102,857, determined as follows:
(A) Step 1: Fair market value
of corpus ...............................
$120,000
(B) Step 2: Corpus required to
produce D’s date of death
annuity ($5,000/.07) ............
71,429
(C) Step 3: Corpus required to
produce D’s annuity if D
had survived C ($10,000/
.07) ........................................
142,857
(D) Step 4: Present value of
C’s interest ............................
40,000
(E) Step 5: The amount determined in Step 3 reduced by
the amount determined in
Step 4, but not to below the
amount determined in Step
2 ($142,857¥$40,000, but
not less than $71,429) ..........
102,857
(F) Step 6: The lesser of the
amounts determined in
Steps 5 and 1 ($102,857 or
$120,000) ..............................
102,857
*
*
*
*
*
(2) * * *
(ii) Graduated retained interests—(A)
In general. For purposes of this section,
a graduated retained interest is the
grantor’s reservation of a right to receive
an annuity, unitrust, or other payment
as described in paragraph (c)(2)(i) of this
section, payable at least annually, that
increases (but does not decrease) over a
period of time, not more often than
annually.
(B) Other definitions—(1) Base
amount. The base amount is the amount
of corpus required to generate the
annuity, unitrust, or other payment
payable for the trust year in which the
decedent’s death occurs. See paragraph
(c)(2)(i) of this section for the
calculation of the base amount.
(2) Periodic addition. The periodic
addition in a graduated retained interest
for each year after the year in which
decedent’s death occurs is the amount
(if any) by which the annuity, unitrust,
or other payment that would have been
payable for that year if the decedent had
survived exceeds the total amount of
payments for the year immediately
preceding that year. For example,
assume the trust instrument provides
that the grantor is to receive an annual
annuity payable to the grantor or his
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estate for a 5-year term. The initial
annual payment is $100,000, and each
succeeding annual payment is to be 120
percent of the amount payable for the
preceding year. Assuming the grantor
dies in the second year of the trust
(whether before or after the due date of
the second annual payment), the
periodic additions for years 3, 4, and 5
of the trust are as follows:
(1)
Annual
payment
Year 3 ......................................................................................................................................................
Year 4 ......................................................................................................................................................
Year 5 ......................................................................................................................................................
(3) Corpus amount. For each trust
year in which a periodic addition occurs
(increase year), the corpus amount is the
amount of trust corpus which, starting
from the decedent’s date of death, is
necessary to generate an amount of
income sufficient to pay the periodic
addition, beginning in the increase year
and continuing in perpetuity, without
reducing or invading principal. For each
year with a periodic addition, the
corpus amount required as of the date
of death is the product of two factors:
the first is the result of dividing the
periodic addition (adjusted for
payments made more frequently than
annually, if applicable, and for
payments due at the beginning, rather
144,000
172,800
207,360
(2)
Prior year
payment
120,000
144,000
172,800
(1–2)
Periodic
addition
24,000
28,800
34,560
than the end, of a payment period (see
Table K or J of § 20.2031–7(d)(6))) by the
section 7520 rate (periodic addition/
rate); and the second is 1 divided by the
sum of 1 and the section 7520 rate
raised to the T power (1/(1 + rate)∧T).
(i) That formula is:
(Periodic Addition) × (Adjustment Factor)
1
×
Section 7520 Rate
(1+Section 7520 Rate)T
(ii) Where adjustment factor, if
applicable, is 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 of § 20.2031–7(d)(6))
and T equals 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.
(C) Amount includible. The amount
includible in the gross estate in the case
of a graduated retained interest is the
sum of the base amount and the corpus
amount 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 reserved graduated retained interest.
The amount of trust corpus includible
in a decedent’s gross estate under this
section, however, shall not exceed the
fair market value of the trust corpus on
the decedent’s date of death. The
provisions of this section also apply to
graduated retained interests in
transferred property not held in trust.
(iii) * * *
*
*
*
*
*
Example 7. (i) On November 1, year N, D
transfers assets valued at $2,000,000 to a
GRAT. Under the terms of the GRAT, the
trustee is to pay to D an annuity for a 5-year
term that qualifies as a qualified interest
described in section 2702(b). The annuity
amount is to be paid annually at the end of
B
Annual
annuity
payment
A
GRAT Year
D
Required
principal: C ×
Adj. factor/ 0.068
C
Periodic
addition
each trust year, on October 31st. The first
annual payment is to be $100,000. Each
succeeding payment is to be 120 percent of
the amount paid in the preceding year.
Income not distributed in any year is to be
added to principal. If D dies during the 5year term, the payments are to be made to D’s
estate for the balance of the GRAT term. At
the end of the 5-year term, the trust is to
terminate and the corpus is to be distributed
to C, D’s child. D dies on January 31st 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 section 7520 interest rate
is 6.8 percent. D’s executor does not elect to
value the gross estate as of the alternate
valuation date.
(ii) The amount includible in D’s gross
estate under section 2036(a)(1) is determined
and illustrated as follows using the
methodology contained in paragraph
(c)(2)(ii)(C) of this section:
E
Deferral
period: death to
GRAT Year
F
Present value
factor:
1/(1+.068)∧E
G
Corpus amount
at death: D × F
3 .......................................
4 .......................................
5 .......................................
144,000
172,800
207,360
n/a
28,800
34,560
2,117,647
423,529
508,235
n/a
0.747945
1.747945
n/a
0.951985
0.891372
2,117,647
403,193
453,026
Total ..........................
............................
............................
............................
............................
............................
2,973,866
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to produce the scheduled payments is as
follows:
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E:\FR\FM\30APP1.SGM
30APP1
EP30AP09.005</MATH>
(iii) An illustration of the amount of trust
corpus (as of the decedent’s death) necessary
Federal Register / Vol. 74, No. 82 / Thursday, April 30, 2009 / Proposed Rules
Year 3
Additional Annuity ......................................................................
$34,560
Additional Annuity ......................................................................
Annuity in Year of Death ...........................................................
28,800
144,000
Deferral Period
$2,117,647 ...........
Total amount included in gross estate (sum) ....................
....................
..............................
(iv) A total corpus amount (as defined in
paragraph (c)(2)(ii)(B)(3) of this section) of
$2,973,866 constitutes the principal required
as of D’s date of death to produce (without
reducing or invading principal) the annual
payments that D would have received if D
had survived and continued to receive the
retained annuity. Therefore, $2,973,866 of
the trust corpus is includible in D’s gross
estate under section 2036(a)(1). The
remaining $226,134 of the trust corpus is not
includible in D’s gross estate under section
2036(a)(1). The result would be the same if
D’s retained annuity instead had been
payable to D for a term of 5 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.
(v) If, instead, D’s annuity was to have been
paid on a monthly or quarterly basis, then the
periodic addition would have to be adjusted
as provided in paragraph (c)(2)(ii)(B)(3) of
this section. Specifically, in Column D of the
Table for years 4 and 5 in this example, the
amount of the principal required would be
computed by multiplying the periodic
addition by the appropriate factor from Table
K or J of § 20.2036–7(d)(6) before dividing as
indicated and computing the amounts in
Columns E through G. In addition, Column
D in year 3 also would have to be so adjusted.
Under the facts presented, section 2039 does
not apply to include any amount in D’s gross
estate by reason of this retained interest. See
§ 20.2039–1(e).
(3) * * * Paragraph (b)(1)(ii) of this
section is applicable to estates of
decedents dying on or after the date of
publication in the Federal Register of
the Treasury decision adopting these
rules as final regulations. The
introductory text of paragraph (c)(1)(ii)
of this section, Example 1 of paragraph
(c)(1)(ii) of this section, all of paragraph
(c)(2)(ii) of this section, and Example 7
of paragraph (c)(2)(iii) of this section,
are applicable to estates of decedents
dying on or after the date of publication
in the Federal Register of the Treasury
decision adopting these rules as final
regulations.
Linda E. Stiff,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. E9–10003 Filed 4–29–09; 8:45 am]
BILLING CODE 4830–01–P
VerDate Nov<24>2008
15:01 Apr 29, 2009
Jkt 217001
Deferral Period
DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade
Bureau
27 CFR Part 9
[TTB Docket No. 2007–0060; Notice No. 94;
Re: Notice Nos. 71 and 72]
RIN 1513–AB27
Proposed Establishment of the Paso
Robles Westside Viticultural Area
(2006R–087P)
Alcohol and Tobacco Tax and
Trade Bureau, Treasury.
ACTION: Withdrawal of notice of
proposed rulemaking.
AGENCY:
SUMMARY: The Alcohol and Tobacco Tax
and Trade Bureau announces the
withdrawal of its proposal to establish
the Paso Robles Westside viticultural
area within the existing Paso Robles
viticultural area in San Luis Obispo
County, California. We take this action
because, given the conflicting
information before us, we cannot
conclude that a delimited grape-growing
region exists that is recognized by the
name Paso Robles Westside.
DATES: Notice No. 71 is withdrawn as of
April 30, 2009.
FOR FURTHER INFORMATION CONTACT: N.
A. Sutton, Regulations and Rulings
Division, Alcohol and Tobacco Tax and
Trade Bureau, 925 Lakeville St., 158,
Petaluma, CA 94952; telephone 415–
271–1254.
SUPPLEMENTARY INFORMATION:
Background
TTB Authority
Section 105(e) of the Federal Alcohol
Administration Act (FAA Act), 27
U.S.C. 205(e), authorizes the Secretary
of the Treasury to prescribe regulations
for the labeling of wine, distilled spirits,
and malt beverages. The FAA Act
provides that these regulations should,
among other things, prohibit consumer
deception and the use of misleading
statements on labels, and ensure that
labels provide the consumer with
adequate information as to the identity
and quality of the product. The Alcohol
and Tobacco Tax and Trade Bureau
PO 00000
Frm 00016
Fmt 4702
Year 4
Sfmt 4702
Year 5
19917
Includible
amount
$453,026
$453,026
$403,193
....................
....................
403,193
2,117,647
....................
....................
2,973,866
(TTB) administers the regulations
promulgated under the FAA Act.
Part 4 of the TTB regulations (27 CFR
part 4) allows the establishment of
definitive viticultural areas and the use
of their names as appellations of origin
on wine labels and in wine
advertisements. Part 9 of the TTB
regulations (27 CFR part 9) sets forth
standards for petitions for the
establishment of viticultural areas and
contains the list of approved viticultural
areas.
Definition
Section 4.25(e)(1)(i) of the TTB
regulations (27 CFR 4.25(e)(1)(i)) defines
a viticultural area for American wine as
a delimited grape-growing region
distinguishable by geographical
features, the boundaries of which have
been recognized and defined in part 9
of the regulations. These designations
allow vintners and consumers to
attribute a given quality, reputation, or
other characteristic of a wine made from
grapes grown in an area to its
geographic origin. The establishment of
viticultural areas allows vintners to
describe more accurately the origin of
their wines to consumers and helps
consumers to identify wines they may
purchase. Establishment of a viticultural
area is neither an approval nor an
endorsement by TTB of the wine
produced in that area.
Requirements
Section 4.25(e)(2) of the TTB
regulations outlines the procedure for
proposing an American viticultural area
and provides that any interested party
may petition TTB to establish a grapegrowing region as a viticultural area.
Section 9.3(b) of the TTB regulations
requires the petition to include—
• Evidence that the proposed
viticultural area is locally and/or
nationally known by the name specified
in the petition;
• Historical or current evidence that
supports setting the boundary of the
proposed viticultural area as the
petition specifies;
• Evidence relating to the geographic
features, such as climate, soils,
elevation, and physical features, that
distinguish the proposed viticultural
area from surrounding areas;
E:\FR\FM\30APP1.SGM
30APP1
]]>Agencies
[Federal Register Volume 74, Number 82 (Thursday, April 30, 2009)]
[Proposed Rules]
[Pages 19913-19917]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-10003]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[REG-119532-08]
RIN 1545-BH94
Section 2036--Graduated Retained Interests
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide
guidance on the portion of trust property includible in the grantor's
gross estate if the grantor has retained the use of the property, the
right to an annuity, unitrust, graduated retained interest, or other
payment from such property for life, for any period not ascertainable
without reference to the grantor's death, or for a period that does not
in fact end before the grantor's death. The proposed regulations will
affect estates that file Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 29, 2009.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-119532-08), Internal
Revenue Service, Room 5203, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
119532-08), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC 20224; or sent electronically via the
Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
119532-08).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Theresa M. Melchiorre, at (202) 622-3090; concerning submissions of
comments or to request a hearing, Richard A. Hurst at Richard.A.Hurst
@irscounsel.treas.gov or (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
On June 7, 2007, proposed regulations (REG-119097-05) were
published in the Federal Register [72 FR 31487] providing guidance on
the portion of trust corpus properly includible in a grantor's gross
estate under sections 2036 and 2039. The IRS and Treasury Department
determined that certain comments received in response to the proposed
regulations should be addressed in a separate notice of proposed
rulemaking, instead of in the final regulations published on July 14,
2008 [73 FR 40173], as TD 9414. Accordingly, this notice of proposed
rulemaking proposes additional changes to the regulations in response
to those comments.
The proposed regulations (REG-119097-05) addressed the amount
includible in the gross estate under sections 2036 and 2039 if the
grantor retains the right to receive an annuity, unitrust, or other
payment from a trust for life, for any period not ascertainable without
reference to the grantor's death, or for a period that does not in fact
end before the grantor's death. The trusts that were the subject of the
proposed regulations included grantor retained interest trusts (GRTs),
such as grantor retained income trusts (GRITs), grantor retained
annuity trusts (GRATs) and grantor retained unitrusts (GRUTs) described
in section 2702, whether or not the grantor's retained interest was a
``qualified interest'' under section 2702(b), as well as other trust
forms, including charitable remainder trusts (CRTs), such as charitable
remainder unitrusts (CRUTs) and charitable remainder annuity trusts
(CRATs) described in section 664 whether or not the trust met the
qualifications of section 664(d)(1), (2), or (3). The proposed
regulations incorporated the methodology provided in Rev. Rul. 76-273,
1976-2 C.B. 268, and Rev. Rul. 82-105, 1982-1 C.B. 133. See Sec.
601.601(d)(2)(ii)(b). Under this methodology, the portion of the corpus
of a GRT or a CRT includible in the decedent's gross estate under
section 2036 is that portion of the trust corpus necessary to generate
a return sufficient to pay the decedent's retained annuity, unitrust,
or other payment.
One commentator suggested that the regulations address the portion
of trust corpus of a GRAT includible in the grantor's gross estate
under section 2036 if the deceased grantor retains an interest
described in Sec. 25.2702-3(b)(1)(ii)(A); that is, the annuity
interest retained by the grantor increases annually during the term of
the trust (a graduated retained interest). The commentator suggested
two possible methods for determining the portion of GRAT corpus
includible in the grantor's gross estate if the grantor dies during the
term of such a GRAT.
Another commentator questioned the result in the example contained
in Sec. 20.2036-1(c)(1)(ii) of the proposed regulations. This example
considered the situation where the decedent (D) creates an irrevocable
inter vivos trust, under the terms of which all trust income is to be
paid to D and E, D's spouse, in equal shares during their joint lives
and, on the death of the first to die of D and E, all trust income is
to be paid to the survivor. On the death of the survivor of D and E,
the remainder is to be paid to another individual, F. D dies survived
by E. The example concludes that, because D retained the right to
receive 50 percent of the trust income for a period that did not in
fact end before D's death, 50 percent of the trust's corpus is
includible in D's gross estate under section 2036. The example also
concludes that, if instead E had predeceased D, D would have died while
entitled to all of the income from the trust, so that the entire trust
corpus would have been includible in D's gross estate under section
2036.
The commentator noted that, because E is identified as D's spouse,
the example unnecessarily raises issues under section 2523 (gift tax
marital deduction). In addition, the commentator opined that, under the
facts presented, D has retained the right to receive one-half of trust
income during the joint lives of D and E, and the right to receive 100
percent of the trust income if D survives E. Thus, 50 percent of the
trust corpus is includible in D's gross estate by virtue of D's
retained right to receive 50 percent of the trust income during D's
life, and the remaining 50 percent of the trust corpus (reduced by the
actuarial value of E's income interest) is includible in D's gross
estate under section 2036 by virtue of D's retained right to receive
all of the trust income provided D survives E.
Explanation of Provisions
In response to the comments, these proposed regulations provide the
method to be used to determine the portion of trust corpus includible
in the grantor's gross estate if the grantor reserves a graduated
retained interest in a trust. This method applies to graduated retained
interests in property whether or not the property is held in trust.
The portion of the corpus of a GRT or a CRT includible in the
decedent's gross estate under section 2036 is that portion of the trust
corpus necessary to generate
[[Page 19914]]
a return sufficient to pay the decedent's retained annuity, unitrust,
or other payment. Consistent with this approach, the proposed
methodology measures the amount of corpus needed to generate sufficient
income to produce the payments that would have been due even after the
decedent's death, as if the decedent had survived and continued to
receive the retained interest. Thus, under the proposed methodology,
the amount of corpus necessary to produce the retained graduated
interest is the sum of the following amounts: (1) The amount of corpus
required to generate sufficient income to pay, without reducing or
invading principal, the annual amount payable to the decedent at the
decedent's death calculated pursuant to Sec. 20.2036-1(c)(2)(i); and
(2) for each succeeding year of the trust, the amount of corpus
required to generate sufficient income to pay, without reducing or
invading principal, the increase (if any) in the annuity, unitrust, or
other payment for that year, deferred until the beginning date of that
increase. The formula to be applied in calculating the corpus for each
such succeeding year of the trust is the product of two factors: the
first is the result of dividing the periodic addition (adjusted for
payments made more frequently than annually, if applicable, and for
payments due at the beginning, rather than the end, of a payment period
(See Table K or J of Sec. 20.2031-7(d)(6)) by the section 7520 rate
(periodic addition/rate); and the second is 1 divided by the sum of 1
and the section 7520 rate raised to the T power (1/(1 +
rate)[supcaret]T). For purposes of this formula, T is the time
(expressed in years or a portion of a year) between the date of the
decedent's death and the first day of the trust's first year for which
the periodic addition is payable. The periodic addition for each year
after the year in which the decedent's death occurs is the amount (if
any) by which the annuity, unitrust, or other payment that would have
been payable for that year (if the decedent had survived) exceeds the
total amount of payments for the year immediately preceding that year,
provided that payments increase (and do not ever decrease). This
formula would be:
[GRAPHIC] [TIFF OMITTED] TP30AP09.004
Where adjustment factor, if applicable, is 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 of Sec. 20.2031-7(d)(6)) and T equals 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.
The proposed regulations also add Sec. 20.2036-1(c)(2)(iii), Example
7, illustrating this computation.
In addition, in response to the comments, Sec. 20.2036-
1(c)(1)(ii), Example 1 (which was reserved in the final regulations
REG-119097-05 (TD 9414)) is added. In this example, trust income is
payable to D and C, D's child, in equal shares during their joint lives
and, on the death of the first to die of D and C, all trust income is
to be paid to the survivor. The example concludes that, if D dies
before C, 100 percent of the trust corpus, reduced by the present value
of C's life interest, is includible in D's gross estate under section
2036. Fifty percent of the trust corpus is includible in D's gross
estate because D retained the right to receive 50 percent of the
trust's income for life. The remaining 50 percent of the trust corpus
(less the present value of C's outstanding life interest) is includible
in D's gross estate because at D's death D retained the right to
receive all of the trust income if D survived C. This result is
consistent with Sec. 20.2036-1(b)(1)(ii).
Finally, Sec. 20.2036-1(b)(1)(ii) is amended to clarify the
computation of the includible amount if the decedent retained the right
to receive an annuity or other payment (rather than income) after the
death of the current recipient of that interest. Example 1 of Sec.
20.2036-1(c)(1)(ii) has been expanded to provide an illustration of
this computation. In general, under this computation, the amount
includible is the portion of the date of death value of the trust
corpus required to produce sufficient income to satisfy the annuity or
other payment the decedent would have been entitled to receive if the
decedent had survived the current recipient, reduced by the present
value of the current recipient's interest. However, the amount
includible shall not be less than the amount of corpus required to
produce sufficient income to satisfy the annuity or other payment the
decedent was entitled to receive for the trust's year in which the
decedent's death occurred. In no event, however, shall the amount
includible exceed the value of the trust corpus on the date of death.
Proposed Effective Date
All of Sec. 20.2036-1(b)(1)(ii), the introductory text of Sec.
20.2036-1(c)(1)(ii), Example 1 of Sec. 20.2036-1(c)(1)(ii), all of
Sec. 20.2036-1(c)(2)(ii), and Example 7 of Sec. 20.2036-1(c)(2)(iii)
are applicable to estates of decedents dying on or after the date of
publication in the Federal Register of the Treasury decision adopting
these rules as final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, this regulation has been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and the Treasury Department also request comments on the
clarity of the proposed regulations and how they may be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing may be scheduled if requested in writing by
any person that timely submits written comments to the IRS. If a public
hearing is scheduled, notice of the date, time, and place for the
hearing will be published in the Federal Register.
Drafting Information
The principal author of these regulations is Theresa M. Melchiorre,
Office of Associate Chief Counsel (Passthroughs and Special
Industries), IRS.
[[Page 19915]]
List of Subjects in 26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 20 is proposed to be amended as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Paragraph 1. The authority citation for part 20 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2036-1 is amended by:
1. Revising paragraph (b)(1)(ii) and paragraph (c)(1)(ii)
introductory text.
2. Adding paragraphs (c)(1)(ii) Example 1, (c)(2)(ii), (c)(2)(iii)
Example 7, and two sentences at the end of paragraph (c)(3).
The revisions and additions read as follows:
Sec. 20.2036-1 Transfers with retained life estate.
* * * * *
(b) * * * (1) * * *
(ii) A decedent reserved the right to receive the income, annuity,
or other payment from transferred property after the death of another
person who was in fact enjoying the income, annuity, or other payment
at the time of the decedent's death. In such a case, the amount to be
included in the decedent's gross estate under this section does not
include the value of the outstanding interest of the other person. If
the other person predeceased the decedent, the reservation by the
decedent may be considered to be either for life, or for a period which
does not in fact end before death. If the decedent retained the right
to receive an annuity or other payment (rather than income) after the
death of the current recipient of that interest, then the amount
includible in the decedent's gross estate under section 2036 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 the decedent had survived the current recipient
(thus, also including the portion of that entire amount payable to the
decedent before the current recipient's death), reduced by the present
value of the current recipient's interest. However, the amount
includible shall not be less than the amount of corpus required to
produce sufficient income to satisfy the annuity or other payment the
decedent was entitled, at the time of the decedent's death, to receive
for each year. In no event, however, shall the amount includible exceed
the value of the trust corpus on the date of death. The following steps
implement this computation.
(A) Step 1: Determine the fair market value of the trust corpus on
the date of death.
(B) Step 2: Determine, in accordance with paragraph (c)(2)(i) of
this section, the amount of corpus required to generate sufficient
income to pay the annuity, unitrust, or other payment (determined on
the date of the decedent's death) payable to the decedent for the trust
year in which the decedent's death occurred.
(C) Step 3: Determine, in accordance with paragraph (c)(2)(i) of
this section, the amount of corpus required to generate sufficient
income to pay the annuity, unitrust, or other payment that the decedent
would have been entitled to receive for each trust year if the decedent
had survived the current recipient.
(D) Step 4: Determine the present value of the current recipient's
annuity, unitrust, or other payment.
(E) Step 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.
(F) Step 6: The amount includible in the decedent's gross estate
under section 2036 is the lesser of the amounts determined in Step 5
and Step 1.
* * * * *
(c) * * * (1) * * *
(ii) Examples. The application of paragraphs (b)(1)(ii) and
(c)(1)(i) of this section is illustrated in the following examples:
Example 1. (i) In 2001, Decedent (D) creates an irrevocable
inter vivos trust. The terms of the trust provide that all of the
trust income is to be paid to D and C, D's child, in equal shares
during their joint lives and, on the death of the first to die of D
and C, all of the trust income is to be paid to the survivor. 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. Fifty percent
of the value of the trust corpus is includible in D's gross estate
under section 2036(a)(1) because, under the terms of the trust, D
retained the right to receive one-half of the trust income for D's
life. In addition, the value of the remaining 50 percent of the
trust corpus, less the present value of C's outstanding life estate,
also is includible in D's gross estate under section 2036(a)(1),
because D retained the right to receive all of the trust income for
such time as D survived C. If C had predeceased D, then 100 percent
of the trust corpus would have been includible in D's gross estate.
(ii) Assume the same facts as above, except that the trust
provides that, rather than all the income, an annuity of $10,000 per
year is to be paid to D and C in equal shares during their joint
lives and, 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 fair market value of the trust is $120,000 and the
section 7520 rate is 7 percent. At the date of death, the amount of
trust corpus needed to produce D's annuity interest ($5,000 per
year) is $71,429 ($5,000/.07). In addition, assume the present value
of C's right to receive $5,000 annually for the remainder of C's
life is $40,000. The portion of the trust corpus includible in D's
gross estate under section 2036(a)(1) is $102,857, determined as
follows:
(A) Step 1: Fair market value of corpus.................... $120,000
(B) Step 2: Corpus required to produce D's date of death 71,429
annuity ($5,000/.07)......................................
(C) Step 3: Corpus required to produce D's annuity if D had 142,857
survived C ($10,000/.07)..................................
(D) Step 4: Present value of C's interest.................. 40,000
(E) Step 5: The amount determined in Step 3 reduced by the 102,857
amount determined in Step 4, but not to below the amount
determined in Step 2 ($142,857-$40,000, but not less than
$71,429)..................................................
(F) Step 6: The lesser of the amounts determined in Steps 5 102,857
and 1 ($102,857 or $120,000)..............................
* * * * *
(2) * * *
(ii) Graduated retained interests--(A) In general. For purposes of
this section, a graduated retained interest is the grantor's
reservation of a right to receive an annuity, unitrust, or other
payment as described in paragraph (c)(2)(i) of this section, payable at
least annually, that increases (but does not decrease) over a period of
time, not more often than annually.
(B) Other definitions--(1) Base amount. The base amount is the
amount of corpus required to generate the annuity, unitrust, or other
payment payable for the trust year in which the decedent's death
occurs. See paragraph (c)(2)(i) of this section for the calculation of
the base amount.
(2) Periodic addition. The periodic addition in a graduated
retained interest for each year after the year in which decedent's
death occurs is the amount (if any) by which the annuity, unitrust, or
other payment that would have been payable for that year if the
decedent had survived exceeds the total amount of payments for the year
immediately preceding that year. For example, assume the trust
instrument provides that the grantor is to receive an annual annuity
payable to the grantor or his
[[Page 19916]]
estate for a 5-year term. The initial annual payment is $100,000, and
each succeeding annual payment is to be 120 percent of the amount
payable for the preceding year. Assuming the grantor dies in the second
year of the trust (whether before or after the due date of the second
annual payment), the periodic additions for years 3, 4, and 5 of the
trust are as follows:
------------------------------------------------------------------------
(2) Prior (1-2)
(1) Annual 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
------------------------------------------------------------------------
(3) Corpus amount. For each trust year in which a periodic addition
occurs (increase year), the corpus amount is the amount of trust corpus
which, starting from the decedent's date of death, is necessary to
generate an amount of income sufficient to pay the periodic addition,
beginning in the increase year and continuing in perpetuity, without
reducing or invading principal. For each year with a periodic addition,
the corpus amount required as of the date of death is the product of
two factors: the first is the result of dividing the periodic addition
(adjusted for payments made more frequently than annually, if
applicable, and for payments due at the beginning, rather than the end,
of a payment period (see Table K or J of Sec. 20.2031-7(d)(6))) by the
section 7520 rate (periodic addition/rate); and the second is 1 divided
by the sum of 1 and the section 7520 rate raised to the T power (1/(1 +
rate)[supcaret]T).
(i) That formula is:
[GRAPHIC] [TIFF OMITTED] TP30AP09.005
(ii) Where adjustment factor, if applicable, is 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
of Sec. 20.2031-7(d)(6)) and T equals 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.
(C) Amount includible. The amount includible in the gross estate in
the case of a graduated retained interest is the sum of the base amount
and the corpus amount 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 reserved graduated retained interest. The
amount of trust corpus includible in a decedent's gross estate under
this section, however, shall not exceed the fair market value of the
trust corpus on the decedent's date of death. The provisions of this
section also apply to graduated retained interests in transferred
property not held in trust.
(iii) * * *
* * * * *
Example 7. (i) On November 1, year N, D transfers assets valued
at $2,000,000 to a GRAT. Under the terms of the GRAT, the trustee is
to pay to D an annuity for a 5-year term that qualifies as a
qualified interest described in section 2702(b). The annuity amount
is to be paid annually at the end of each trust year, on October
31st. The first annual payment is to be $100,000. Each succeeding
payment is to be 120 percent of the amount paid in the preceding
year. Income not distributed in any year is to be added to
principal. If D dies during the 5-year term, the payments are to be
made to D's estate for the balance of the GRAT term. At the end of
the 5-year term, the trust is to terminate and the corpus is to be
distributed to C, D's child. D dies on January 31st 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 section 7520 interest rate is 6.8
percent. D's executor does not elect to value the gross estate as of
the alternate valuation date.
(ii) The amount includible in D's gross estate under section
2036(a)(1) is determined and illustrated as follows using the
methodology contained in paragraph (c)(2)(ii)(C) of this section:
--------------------------------------------------------------------------------------------------------------------------------------------------------
D Required
B Annual annuity C Periodic principal: C x E Deferral F Present value G Corpus amount
A GRAT Year payment addition Adj. factor/ period: death to factor: 1/ at death: D x F
0.068 GRAT Year (1+.068)[supcaret]E
--------------------------------------------------------------------------------------------------------------------------------------------------------
3........................................ 144,000 n/a 2,117,647 n/a n/a 2,117,647
4........................................ 172,800 28,800 423,529 0.747945 0.951985 403,193
5........................................ 207,360 34,560 508,235 1.747945 0.891372 453,026
--------------------------------------------------------------------------------------------------------------
Total................................ ................ ................ ................ ................ ................... 2,973,866
--------------------------------------------------------------------------------------------------------------------------------------------------------
(iii) An illustration of the amount of trust corpus (as of the
decedent's death) necessary to produce the scheduled payments is as
follows:
[[Page 19917]]
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Includible
Year 3 Year 4 Year 5 amount
----------------------------------------------------------------------------------------------------------------
Additional Annuity............. $34,560 Deferral Period $453,026 $453,026
---------------------------------------
Additional Annuity............. 28,800 Deferral Period $403,193 403,193
Annuity in Year of Death....... 144,000 $2,117,647.............. ........... ........... 2,117,647
--------------------------------------------------------------------------------
Total amount included in ........... ........................ ........... ........... 2,973,866
gross estate (sum).
----------------------------------------------------------------------------------------------------------------
(iv) A total corpus amount (as defined in paragraph
(c)(2)(ii)(B)(3) of this section) of $2,973,866 constitutes the
principal required as of D's date of death to produce (without
reducing or invading principal) the annual payments that D would
have received if D had survived and continued to receive the
retained annuity. Therefore, $2,973,866 of the trust corpus is
includible in D's gross estate under section 2036(a)(1). The
remaining $226,134 of the trust corpus is not includible in D's
gross estate under section 2036(a)(1). The result would be the same
if D's retained annuity instead had been payable to D for a term of
5 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.
(v) If, instead, D's annuity was to have been paid on a monthly
or quarterly basis, then the periodic addition would have to be
adjusted as provided in paragraph (c)(2)(ii)(B)(3) of this section.
Specifically, in Column D of the Table for years 4 and 5 in this
example, the amount of the principal required would be computed by
multiplying the periodic addition by the appropriate factor from
Table K or J of Sec. 20.2036-7(d)(6) before dividing as indicated
and computing the amounts in Columns E through G. In addition,
Column D in year 3 also would have to be so adjusted. Under the
facts presented, section 2039 does not apply to include any amount
in D's gross estate by reason of this retained interest. See Sec.
20.2039-1(e).
(3) * * * Paragraph (b)(1)(ii) of this section is applicable to
estates of decedents dying on or after the date of publication in the
Federal Register of the Treasury decision adopting these rules as final
regulations. The introductory text of paragraph (c)(1)(ii) of this
section, Example 1 of paragraph (c)(1)(ii) of this section, all of
paragraph (c)(2)(ii) of this section, and Example 7 of paragraph
(c)(2)(iii) of this section, are applicable to estates of decedents
dying on or after the date of publication in the Federal Register of
the Treasury decision adopting these rules as final regulations.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-10003 Filed 4-29-09; 8:45 am]
BILLING CODE 4830-01-P
