Qualified annuity can be based on two lives .

• Author: O'Driscoll, David

A transferred 11,400 shares of SCS nonvoting common stock to herself as trustee of the P qualified annuity trust, a grantor retained annuity trust (GRAT). P provided that 11.54% of the initial net fair market value (FMV) would be paid to the grantor commencing on June 1, 1994, and ending 15 years later or (if sooner) on the grantor's death. If A died before the end of the 15-year term, the annuity would be paid to her spouse for the balance of the term, unless the right had been previously revoked by the grantor. If the spouse did not survive the grantor or if the grantor had revoked the spouse's interest, the annuity payments would cease; the remaining GRAT property would be held in trust for the surviving spouse or for the grantor's descendants.

On the same date, A's spouse R transferred 11,400 shares of SCS nonvoting common stock to himself as trustee of the Q qualified annuity trust, also a GRAT. The annuity payments were identical in material respects to P's. For the Q Trust, if the grantor survived the 15-year term, the remaining GRAT assets would be held in trust for the grantor's spouse (if then living) or otherwise for the grantor's descendants. For P, if the grantor survived the 15-year term, the remaining GRAT assets would be held in trust for the grantors descendants.

A and R each filed a gift tax return for 1994, showing two taxable gifts of $35,959, based on the FMV of the transfer to each trust ($4,046,197) minus the value of each two-life annuity ($4,010,238). The IRS disqualified the annuities and assessed gift tax deficiencies against A of $126,680, and against R of $137,953. The Tax Court held that an annuity measured by two lives was unqualified, because it could extend beyond the life of "the term holder." It rejected A's and R's reliance on Regs. Sec. 25.2702-2(d), Example 7.

Analysis

A qualified interest is defined under Sec. 2702(b) as:

1. Any interest which consists of the right to receive fixed amounts payable not less frequently than annually;

2. Any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the FMV of the property in the trust (determined annually); and

3. Any noncontingent remainder interest if all other trust interests consist of interests described in 1 or 2 above.

In addition, Regs. Sec. 25.2702-2(a)(5) states that a:

Qualified interest means a qualified annuity interest, a qualified unitrust interest, or a...