... Transfers in trust.

• Author: Gardner, John C.

Generally, the value of any retained interest that is not a qualified interest will be treated as zero. Retained interests that are qualified interests will be valued under Sec. 7520.

A qualified interest is one that is in an easily valued form, such as an annuity or unitrust interest. This valuation rule applies to the following types of transactions. * Transfers in trust, including grantor retained income trusts (GRITs): Prop. Regs. Sec. 25.2702-2(a)(2) provides that a transfer in trust includes a transfer to a new or existing trust, or an assignment of an interest in an existing trust. Not included are the exercise of a nongeneral power of appointment or the execution of a qualified disclaimer. * A transfer of property that has one or more term interests: Term interest means a life interest or a term of years. * Joint purchases of property by family members and sales of remainder interest: The requirement that the retained interest (for instance, the income interest in a GRIT) be a qualified interest annuity/unitrust payout) will reduce the benefit of these types of transactions. The favorable valuation assumptions, produced by Sec. 7520's use of 120% of the midterm applicable federal rate (AFR) in connection with low-income producing property, will no longer be available. Example 1: In October 1991, father F makes a transfer worth $100,000 in a personal residence GRIT for 10 years that qualifies under the new rules. The applicable Sec. 7520 rate for October 1991 is 9.0%. IRS Publication 1457 provides in Table B that, at this interest rate, the following factors apply for a 10-year term interest.

Income interest: 0.577589

Remainder: 0.422411

Annuity: 6.4177

Thus, F's retained interest would be valued at $57,758.90 and the transferred interest would be valued at $42,241.10. This is the same result as could have been obtained from a transfer of cash to a GRIT under pre-Chapter 14 rules.

On the other hand, if F transfers $100,000 into a grantor retained annuity trust (GRAT) for 10 years and retains an 8% annuity ($8,000), the value of the transferred interest is significantly greater. The annuity interest would be valued at $51,341.60 (6.4177 x $8,000) and the transferred interest would be valued at $48,658.40 ($100,000 -- $51,341.601. Consequently, the gift tax associated with this higher value would be greater and the cash transaction is not as attractive as under pre-Chapter 14 rules.

A joint purchase involving property with one or more...