Computing the includible portion for graduated GRATs.

• Author: Robertson, Bryan P.
• Position: Grantor retained annuity trusts

The IRS recently issued final Sec. 2036 1 regulations' that demonstrate how to calculate the portion of a graduated grantor retained annuity trust that is includible in the estate of a grantor who predeceases the term of the trust. The regulations provide that the includible portion is the lesser of (1) the fair market value of the trust corpus on the decedent's date of death or (2) a computed amount. The computed amount generally equals the total of (1) the amount of corpus required to generate the annuity payable in the trust year during which the decedent's death occurs and (2) the present values of the amounts of corpus necessary to generate the graduated annuity balances for each trust year following the year during which the decedent's death occurs.(2) Given the relatively large number of variables (3) included in the computation addressed in the regulations, broad and universal generalizations for planning purposes are impossible. The regulations do, however, provide practitioners a reminder that planning discussions with clients considering graduated grantor retained annuity trusts should include a review of the potential consequences presented if the grantor dies prematurely. The regulations may even provide the opportunity in such cases, by managing the percentage of the trust value that is annuitized, to plan for the transfer of assets free of estate and gift taxes.

Background

Graduated grantor retained annuity trusts allow grantors to maximize the growth period for property transferred to the trust by requiring successively larger annuity payments throughout the trust term. Such an annuity, as compared to one with level payments for example, has the tendency to lengthen the period during which property is allowed to grow in value inside the trust. Often referred to as "back load" annuities, the annual increase in annuity payments is generally limited to no more than 20% of the annuity payment of the immediately preceding year.

Regulations

The final4 regulations outline the computation of the computed amount as the corpus required to fund the annuity and the present value of the corpus required to fund increases in the annuity.

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 [section] 20.2031-7 (or [section] 20.203 1-7A), if applicable. (5) 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. (6) 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...