Prop. Regs. address application of Secs. 2036 and 2039 to certain annuities.

• Author: Nevius, Alistair J.D.

Sec. 2036 provides for the inclusion in a decedent's estate of certain transfers the decedent made during his or her lifetime in which the decedent retained certain rights in the property. Sec. 2039 provides for the inclusion in a decedent's estate of the value of any annuity receivable by a beneficiary by reason of surviving the decedent if such annuity was payable to the decedent. These provisions may overlap in the case of certain tax planning techniques a decedent executed during his or her lifetime that were still in place at the time of the decedent's death. The determination of value for estate tax purposes can vary significantly depending on whether a decedent's estate applies Sec. 2036 or Sec. 2039 in these cases. The IRS has issued proposed regulations under Secs. 2036 and 2039 to provide for the uniform application of Sec. 2036 in these cases (REG-119097-05 (6/6/07)).

The proposed regulations provide that, if a decedent transfers property during life to a trust and retains the right to an annuity, unitrust, or other income payment from, or retains the use of an asset in, the trust for the decedent's life, the decedent has retained the right to income from all or a specific portion of the property under Sec. 2036. These transfers involve transfers to a charitable remainder trust (CRT) or a grantor retained (annuity/unitrust/income) trust (GRT). The portion of the trust corpus includible in the decedent's gross estate is that portion of the trust corpus, valued as of the decedent's death, necessary to yield that annual payment using the appropriate Sec. 7520 interest rate. The proposed regulations provide both rules and examples for calculating the amount of the mast to be included in a...