Graduated Retained Interests, 69126-69131 [2011-28824]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 216 (Tuesday, November 8, 2011)]
[Rules and Regulations]
[Pages 69126-69131]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28824]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[TD 9555]
RIN 1545-BH94


Graduated Retained Interests

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the portion of property (held in trust or otherwise) 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 the 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 final 
regulations will affect estates that file Form 706, United States 
Estate (and Generation-Skipping Transfer) Tax Return.

DATES: Effective Date: These regulations are effective on November 8, 
2011.
    Applicability Date: For dates of applicability, see Sec.  20.2036-
1(c)(3).

FOR FURTHER INFORMATION CONTACT: Theresa M. Melchiorre at (202) 622-
3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    On April 30, 2009, proposed regulations (REG-119532-08) were 
published in the Federal Register (74 FR 19913). The proposed 
regulations provide the method required to determine the portion of 
trust corpus of a grantor retained annuity or unitrust trust (GRT) that 
is 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) or (b)(1)(ii)(B) or Sec.  25.2702-3(c)(1)(ii); that is, 
the interest retained by the grantor increases annually during the term 
of the trust (a graduated retained interest). This method would apply 
to graduated retained interests in transferred property whether or not 
held in trust.
    In addition, the proposed regulations would add Sec.  20.2036-
1(c)(1)(ii), Example 1, illustrating the amount includible under 
section 2036 if the decedent transfers property in trust pursuant to 
the terms of which trust income is payable to the decedent and 
decedent's child, C, in equal shares during their joint lives and, on 
the death of the first to die of decedent and C, all trust income is to 
be paid to the survivor. The proposed regulations also would amend 
Sec.  20.2036-1(b)(1)(ii) to address the method required to determine 
the amount includible under section 2036 if the decedent and C were 
entitled to receive annuity interests rather than trust income.
    Written comments were received on the proposed regulations. No 
public hearing was scheduled because no individual or organization 
requested the opportunity to provide oral comments at a hearing. All 
comments are available at www.regulations.gov or upon request. The 
proposed regulations, with certain changes made in response to the 
written comments received, are adopted as final regulations.

Summary of Comments and Explanation of Provisions

Section 20.2036-1(b)(1)(ii)--Determining the Portion Includible if the 
Decedent's Retained Annuity Follows a Preceding Annuity Interest

    Section 20.2036-1(b)(1)(ii) of the proposed regulations provides 
the method required to compute the amount includible in the decedent's 
gross estate under section 2036 in a situation where the decedent is to 
receive a payment (or an increased payment) after the death of another 
beneficiary who is receiving an annuity or other payment at the time of 
the decedent's death. If the decedent predeceases the other 
beneficiary, under the proposed regulations, the amount includible is 
the greater of: (1) The amount of corpus required to generate 
sufficient income to pay the annuity payable to the decedent as of the 
date of death; or (2) the amount of 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 
other beneficiary, reduced by the present value of the other 
beneficiary's interest. The amount includible, however, cannot exceed 
the fair market value of the trust corpus on the date of death.
    One commentator opined that this method attributes to the decedent 
a greater portion of a trust's value than is

[[Page 69127]]

appropriate, because the method does not take into account any 
depletion of trust principal that is assumed if the annuity payable to 
the current recipient is a greater percentage of the trust corpus than 
the assumed rate of return based on the applicable section 7520 rate. 
Alternatively, the commentator proposed that the amount includible 
under section 2036 should be the sum of: (1) The amount of trust corpus 
required to produce sufficient income to satisfy the annuity or other 
payment the decedent was receiving at death; plus the lesser of: (A) 
The amount of trust corpus required to produce sufficient income to 
satisfy the additional annuity payable to the decedent if the decedent 
had survived the current recipient; or (B) the fair market value of the 
corpus on the date of the decedent's death less the present value of 
the current recipient's annuity.
    The requested approach in the comment was not adopted because it is 
inconsistent with the existing regulations. The regulations have 
provided, historically, that if the decedent retained or reserved an 
interest or right with respect to all or a portion of the property 
transferred, then the amount includible under section 2036 is the value 
of the property with respect to which the decedent retained the 
interest less the value of any outstanding income interest that is not 
subject to the decedent's retained interest and that is being enjoyed 
by another person at the time of decedent's death. Nevertheless, once 
this computation has been completed, a ceiling on the amount includible 
in the gross estate under section 2036 (specifically, the fair market 
value of the trust at death) is imposed. The method in the proposed 
regulations implements this principle. This method has been clarified 
in the final regulations by providing that, solely for the purpose of 
calculating the present value of the current recipient's interest in 
this computation, the exhaustion of trust corpus test described in 
Sec.  20.7520-3(b)(2) is not to be applied in cases where Sec.  
20.7520-3(b)(2) would otherwise require it to be applied.

Clarification of Sec.  20.2036-1(c)(1)(ii), Paragraph (i) of Example 1

    In response to a comment, paragraph (i) of Example 1 in Sec.  
20.2036-1(c)(1)(ii) has been revised to clarify that the present value 
of C's outstanding life estate reduces only the 50 percent of trust 
corpus from which it is payable.

Section 20.2036-1(c)(2)(ii)--Amount Includible in the Case of a 
Graduated Retained Interest

    In response to a commentator's request for a detailed example, a 
step-by-step illustration of the method described in Sec.  20.2036-
1(c)(2)(ii) (renumbered as Sec.  20.2036-1(c)(2)(iii) in the final 
regulations) has been added in Example 7 of Sec.  20.2036-1(c)(2)(iv).

Section 20.2036-1(c)(2)--Inclusion Under Sections 2036 and 2033

    One commentator requested that the regulations clarify the 
interaction of sections 2033 and 2036 in a situation where the decedent 
establishes a GRT under the terms of which the retained interest is 
paid to the decedent for a specified term of years and, if the decedent 
dies prior to the expiration of that term, the retained annuity or 
other payment is to be paid to the decedent's estate for the balance of 
the term. See for example Sec.  25.2702-3(e), Example 5.
    The commentator noted that, because all or a portion of the trust 
corpus is includible in the decedent's gross estate under section 2036, 
the annuity or other payments that become payable after the decedent's 
death and are required to be paid to the estate for the remainder of 
the trust term are reflected in the amount includible under section 
2036, and therefore should not also be includible under section 2033.
    The IRS and the Treasury Department agree. To the extent that all 
or a portion of the trust corpus is includible in the gross estate 
under section 2036 as a result of the decedent's retained annuity or 
other interest, double inclusion of the same asset would result if any 
payment that becomes payable after the decedent's date of death to the 
estate also is included in the decedent's gross estate under section 
2033 as a separate item. Accordingly, Sec.  20.2036-1(c)(1)(i) of the 
regulations has been revised to provide specifically that payments that 
become payable to the decedent's estate after the decedent's death (as 
opposed to payments that are payable to the decedent prior to the 
decedent's death but are not paid until after the decedent's death) are 
not subject to inclusion under section 2033, if section 2036 is applied 
to include all or a portion of the trust corpus in the gross estate. 
This rule is also reflected in Sec.  20.2036-1(c)(2)(iv), Example 2 
paragraph (ii) and Example 7.
    The payments described in the preceding paragraph are to be 
distinguished, however, from annuity or other payments payable to the 
decedent prior to the decedent's date of death, but that are not paid 
until after death. Such payments are includible in the decedent's gross 
estate under section 2033 as a separate receivable. Thus, such an 
amount payable by the trust reduces the fair market value of the trust 
as of the date of death, but is included in the decedent's gross estate 
under section 2033 as a receivable amount.

Organizational Changes to and Clarification of Sec.  20.2036-1(b) and 
(c)

    In response to comments, the method set forth in Sec.  20.2036-
1(b)(1)(ii) of the proposed regulations for calculating the amount 
includible if part or all of the decedent's retained annuity follows an 
annuity interest payable to another at the time of the decedent's death 
has been moved to a separate section, Sec.  20.2036-1(c)(2)(ii). As a 
conforming change, paragraph (ii) of Example 1 of Sec.  20.2036-
1(c)(1)(ii) has been moved and renumbered as Example 8 of Sec.  
20.2036-1(c)(2)(iv) in the final regulations.
    Also in response to a comment, the manner of computing the amount 
to be included in the decedent's gross estate has been clarified at the 
end of Sec.  20.2036-1(c)(2)(i).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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 Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of these regulations is Theresa M. Melchiorre, 
Office of Associate Chief Counsel (Passthroughs and Special 
Industries), IRS.

List of Subjects in 26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

[[Page 69128]]

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 20 is amended as follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

0
Paragraph 1. The authority citation for part 20 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 20.2036-1 is amended by:
0
1. Revising paragraph (b)(1)(ii).
0
2. Adding two sentences at the end of paragraph (c)(1)(i).
0
3. Adding paragraph (c)(1)(ii) Example 1.
0
4. Removing the third sentence of paragraph (c)(2)(i) and adding three 
new sentences in its place.
0
5. Redesignating paragraphs (c)(2)(ii) and (c)(2)(iii) as paragraphs 
(c)(2)(iii) and (c)(2)(iv), respectively.
0
6. Adding new paragraph (c)(2)(ii) and text to newly-designated 
paragraph (c)(2)(iii).
0
7. Revising the introductory text of and adding Example 7 and Example 8 
to newly-designated paragraph (c)(2)(iv).
0
8. Adding 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 as 
determined in paragraphs (c)(1)(i) and (c)(2)(ii) of this section. See 
also, paragraphs (c)(1)(ii) Example 1 and (c)(2)(iv) Example 8 of this 
section. If the other person predeceased the decedent, the reservation 
by the decedent may be considered to be either for life, or for a 
period that does not in fact end before death.
* * * * *
    (c) * * *
    (1) * * *
    (i) * * * If this section applies to an interest retained by the 
decedent in a trust or otherwise and the terms of the trust or other 
governing instrument provide that, after the decedent's death, payments 
the decedent was receiving during life are to continue to be made to 
the decedent's estate for a specified period (as opposed to payments 
that were payable to the decedent prior to the decedent's death but 
were not actually paid until after the decedent's death), such payments 
that become payable after the decedent's death are not includible in 
the decedent's gross estate under section 2033 because they are 
properly reflected in the value of the trust corpus included under this 
section. Payments that become payable to the decedent prior to the 
decedent's date of death, but are not paid until after the decedent's 
date of death, are includible in the decedent's gross estate under 
section 2033.
    (ii) * * *

    Example 1.  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 D's child, C, 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. Subsequently, 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 excess (if any) of the value of the remaining 
50 percent of the trust corpus, over the present value of C's 
outstanding life estate in that 50 percent of trust corpus, 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.
* * * * *
    (2) * * *
    (i) * * * The portion of the trust's corpus includible in the 
decedent's gross estate for Federal estate tax purposes is that portion 
of the trust corpus necessary to provide the decedent's retained use or 
retained annuity, unitrust, or other payment (without reducing or 
invading principal). In the case of a retained annuity or unitrust, the 
portion of the trust's corpus includible in the decedent's gross estate 
is that portion of the trust corpus necessary to generate sufficient 
income to satisfy the retained annuity or unitrust (without reducing or 
invading principal), using the interest rates provided in section 7520 
and the adjustment factors prescribed in Sec.  20.2031-7 (or Sec.  
20.2031-7A), if applicable. The computation is illustrated in paragraph 
(c)(2)(iv), Examples 1, 2, and 3 of this section. * * *
    (ii) Decedent's retained annuity following a current annuity 
interest of another person. 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 this section 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 addition, in no event shall the amount includible 
exceed the value of the trust corpus on the date of death. Finally, in 
calculating the present value of the current recipient's interest, the 
exhaustion of trust corpus test described in Sec.  20.7520-3(b)(2) 
(exhaustion test) is not to be applied, even in cases where Sec.  
20.7520-3(b)(2) would otherwise require it to be applied. The following 
steps implement this computation.
    (A) Step 1: Determine the fair market value of the trust corpus on 
the decedent's 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 (without applying the exhaustion 
test).
    (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 this section is the lesser of the amounts determined in Step 5 
and Step 1.

[[Page 69129]]

    (iii) 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 that would 
have been payable 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 the grantor's 
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     (2) Prior  year   (1-2)  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 decedent's 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)[caret]T). The second factor applies a present 
value discount to reflect the period beginning with the date of death 
and ending on the last day of the trust year immediately before the 
year for which the periodic addition is first payable.
    (i) The corpus amount is determined as follows:
    [GRAPHIC] [TIFF OMITTED] TR08NO11.026
    
    (ii) The 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)). T equals the time period in years from the 
decedent's 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 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.
    (iv) Examples. The application of paragraphs (c)(2)(i), (c)(2)(ii), 
and (c)(2)(iii) of this section is illustrated in the following 
examples:
* * * * *
    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 is 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, 
the section 7520 interest rate is 6.8 percent, and the adjustment 
factor from Table K of Sec.  20.2031-7 is 1.0000. D's executor does 
not elect to value the gross estate as of the alternate valuation 
date pursuant to section 2032.
    (ii) The amount includible in D's gross estate under section 
2036(a)(1) as described in paragraph (c)(2)(iii)(C) of this section 
is determined and illustrated as follows:

[[Page 69130]]

[GRAPHIC] [TIFF OMITTED] TR08NO11.027

    (iii) Specifically:
    (A) Column A. First, determine the year of the trust term during 
which the decedent's death occurs, and the number of subsequent 
years remaining in the trust term for which the decedent retained or 
reserved an interest. In this example, D dies during year 3, with 
two additional years remaining in the term.
    (B) Column B. Under the formula specified in the trust, the 
annuity payment to be made on October 31st of the 3rd year of the 
trust term is $144,000. Using that same formula, determine the 
annuity amounts for years 4 and 5.
    (C) Column C. Determine the periodic addition for year 4 and 
year 5 by subtracting the annuity amount for the preceding year from 
the annuity amount for that year; the periodic addition for that 
year is the amount of the increase in the annuity amount for that 
year.
    (D) Columns D through G for year 3. For the year of the 
decedent's death (year 3), determine the principal required to 
produce the annuity amount (Column D) by multiplying the annuity 
amount (Column B) by the adjustment factor (in this case 1.0000) and 
by dividing the product by the applicable interest rate under 
section 7520. Because this is the year of decedent's death and 
reflects the annuity amount payable to the decedent in that year, 
there is no deferral, so this is also the Base Amount (the amount of 
corpus required to produce the annuity for year 3) (Column G).
    (E) Columns D through G for years 4 and 5. For each succeeding 
year of the trust term during which the periodic addition will not 
be payable until a year subsequent to the year of the decedent's 
death, determine the principal required to produce the periodic 
addition payable for that year (Column D) by multiplying the 
periodic addition (Column C) by the adjustment factor and by 
dividing the product by the applicable interest rate under section 
7520. Compute the factors to reflect the length of the deferral 
period (Column E) and the present value (Column F) as described in 
paragraph (c)(2)(iii)(B)(3) of this section. Multiply the amount of 
corpus in Column D by the factors in Columns E and F to determine 
the Corpus Amount for that year (Column G).
    (F) Column G total. The sum of the amounts in Column G 
represents the total amount includable in the gross estate (but not 
in excess of the fair market value of the trust on the decedent's 
date of death).
    (iv) An illustration of the amount of trust corpus (as of the 
decedent's death) necessary to produce the scheduled payments is as 
follows:
[GRAPHIC] [TIFF OMITTED] TR08NO11.028

    (v) A total corpus amount (as defined in paragraph 
(c)(2)(iii)(B)(3) of this section) of $2,973,866 constitutes the 
principal required as of decedent's date of death to produce 
(without reducing or invading principal) the annual payments that D 
would have received if D had survived and had 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.
    (vi) 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)(iii)(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.  20.2031-7(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).
    Example 8. (i) D creates an irrevocable inter vivos trust. The 
terms of the trust provide that an annuity of $10,000 per year is to 
be paid to D and C, D's child, in equal shares during their joint 
lives. 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 the death 
of the survivor of D and C, the remainder is to be paid to another 
individual, F. Subsequently, D dies survived by C. 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 D's death, the amount 
of trust corpus needed to produce D's annuity interest ($5,000 per 
year) is $71,429 ($5,000/0.07). In addition, assume the present 
value of C's right to receive $5,000 annually for the remainder of

[[Page 69131]]

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:

(ii) Step 1: Fair market value of corpus..............          $120,000
(iii) Step 2: Corpus required to produce D's date of              71,429
 death annuity ($5,000/0.07)..........................
(iv) Step 3: Corpus required to produce D's annuity if           142,857
 D had survived C ($10,000/0.07)......................
(v) Step 4: Present value of C's interest.............            40,000
(vi) Step 5: The amount determined in Step 3, reduced            102,857
 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)...........................
(vii) Step 6: The lesser of the amounts determined in            102,857
 Steps 5 and 1 ($102,857 or $120,000).................
 

    (3) Effective/applicability dates. * * * All but the last two 
sentences at the end of paragraph (c)(1)(i) of this section are 
applicable to the estates of decedents dying after August 16, 1954. The 
first, second, and sixth sentences in paragraph (c)(2)(i) of this 
section and all but the introductory text, Example 7, and Example 8 of 
paragraph (c)(2)(iv) of this section are applicable to the estates of 
decedent's dying on or after July 14, 2008. Paragraph (b)(1)(ii) of 
this section, the last two sentences at the end of paragraph (c)(1)(i) 
of this section, Example 1 of paragraph (c)(1)(ii) of this section, the 
third, fourth, and fifth sentences in paragraph (c)(2)(i) of this 
section; paragraph (c)(2)(ii) of this section; paragraph (c)(2)(iii) of 
this section; and the introductory text, Example 7, and Example 8 of 
paragraph (c)(2)(iv) of this section are applicable to the estates of 
decedents dying on or after November 8, 2011.

    Approved: October 27, 2011.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-28824 Filed 11-7-11; 8:45 am]
BILLING CODE 4830-01-P