IRS GRAT ruling raises planning concerns.

• Author: Gardner, John
• Position: Grantor retained annuity trust - Brief Article

The IRS has issued Letter Ruling (TAM) 9604005, which calls into question a technique that has been used to make payments out of grantor retained annuity trusts (GRATs) when there is not sufficient cash to meet the obligation. Notes have been used to make the required annual annuity payments rather than distributing property out of the GRAT. The TAM concludes that the GRATs that were the subject of the ruling did not meet the requirements of Sec. 2702 because the annuity payments were to be made with funds borrowed from the grantors.

A GRAT is a grantor trust in which the grantor transfers property and retains a qualified interest in the property. This retained income interest, in the form of a fixed annual annuity payment, results in a lesser gift tax value for the remainder interest. Sec. 2702 and the regulations thereunder require that the payments must be a qualified annuity interest. Regs. Sec. 25.2702-3 (b) (1) sets forth the requirements that must be satisfied in order for an interest to be a qualified annuity interest. A qualified annuity interest is the right to receive a fixed amount. The annuity amount must be payable to or for the benefit of the holder of the annuity interest for each tax year of the term. A fixed amount means either a stated dollar amount...