Significant recent developments in estate planning.
The Tax Adviser › Vol. 27 Nbr. 12, December 1996
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Summary
Estate planning professionals should be aware of numerous changes to the laws governing estates, trusts and gifts that have resulted from legislation and cases decided April 1995 through August 1996. The use of grantor retained trusts was limited, drafting requirements were added for qualified personal residence trusts and Crummey powers were attacked. Related party loans and transfers to trusts were found to be gifts. Other decisions and regulations also addressed special valuation, generation-skipping transfer tax, marital deduction and charitable trust issues.
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Extract
Significant recent developments in estate planning.
The past year has produced a number of key estate planning developments, including some long-anticipated legislative changes. This article will examine court decisions, IRS rulings and regulations, and changes in the tax law significantly affecting estate planning that occurred between Apr. 1, 1995 and Aug. 31, 1996. The article begins by examining the period's most prominent and controversial developments, including new statutory provisions important to estate planners followed by a discussion of other developments, organized by topic.
Highlights The past year's highlights included: * Controversial proposed regulations were issued requiring trust agreements to prohibit certain individuals and entities from purchasing a residence held in a qualified personal residence trust (QPRT). * The IRS attacked the use of notes to satisfy annuity payments from a grantor retained annuity trust (GRAT). * Final regulations barred "zeroed-out" GRATs. * The IRS restricted the allocation of precontribution capital gains to trust accounting income (TAI) of a charitable remainder unitrust (CRUT). * The IRS attacked the use of Crummey powers to create present interests. * New legislation was enacted. QPRT Prop. Regs. The IRS issued proposed regulations amending Regs. Secs. 25.2702-5 and -7, dealing with QPRTs.(1) Under Prop. Regs. Secs. 25.2702-1(b)(1), (c)(9) and -7, for trusts created after May 16, 1996, a QPRT's governing instrument must prohibit the grantor, his spouse or an entity controlled by either from purchasing the residence from the trust both during and after the retained term. While the proposed regulations will not apply retroactively, if the facts and circumstances indicate a preplanned purchase, the IRS may challenge pre-effective date QPRTs. Prop. Regs. Sec. 25.2702-5(a)(2) addresses reformation of QPRT documents. A QPRT that does not include the provision discussed above is deemed to comply if the trust is reformed judicially or nonjudicially (if effective under state law) within a prescribed time period. The IRS justification for the repurchase prohibition is to prevent a grantor from "baiting and switching," so that at the end of the trust term, beneficiaries receive assets other than the residence, while the requirements for a GRAT or grantor retained unitrust (GRUT) are avoided. Under Rev. Rul. 85-13,(2) if a QPRT is structured to remain as a grantor trust after the term holder's interest expires, and the grantor purchases the residence from the trust at that time, no gain is recognized. If the grantor subsequently the owning the residence (or a residence with a substituted basis), the beneficiaries receive the residence with a stepped-up basis; gain on the residence thus escapes taxation in the grantor's generation. (This is not a valuatio...See the full content of this document
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