IRS acquiesces in Walton.

• Author: Laffie, Lesli S.
• Position: From The IRS

According to Notice 2003-72, the IRS has decided to follow the Tax Court's holding in Audrey J. Walton, 115 TC 589 (2000), that Regs. Sec. 25.2702-3(e), Example 5, is invalid. (For background, see Whitlock and McNamara. "Significant Recent Developments in Estate Planning (Part II)," TTA, Sept. 2001, p. 618.) Accordingly, on the facts presented in that example, the IRS will treat a retained unitrust interest payable to a taxpayer or his or her estate as a qualified interest payable for a 10-year term.

Overview: Sec. 2702 provides special rules for valuing gifts in trust when the donor or an applicable family member retains a trust interest. If the retained interest is not a "qualified interest," it is valued at zero; the gift is the entire value of the transferred property. If the retained interest is a qualified interest, the interest is valued under Sec. 7520 using the prescribed actuarial tables and interest rates; the gift is the value of the transferred property reduced by the retained interest's value.

Under Sec. 2702(b), a qualified interest is (1) one that consists of a right to receive fixed amounts payable not less frequently than annually (a qualified annuity interest); (2) one that consists of a right--payable at least annually--to receive a fixed percentage of the trust corpus's net fair market value, determined annually (a qualified unitrust interest); and (3) a right to receive a non-contingent remainder interest if all the other interests in the trust are qualified annuity or unitrust interests (a qualified remainder interest). Under Regs. Sec. 25.2702-3(d)(3), the qualified annuity or unitrust interest must be payable "for the life of the term bolder, for a specified term of years, or for the shorter (but not longer) of those periods."

In Regs. Sec. 25.2702-3(e), Example 5, A transfers property to an irrevocable trust, retaining the...