Prop. Regs. on Graduated Retained Interests Under Sec. 2036

By Alistair M. Nevius, J.D.

On April 30, the IRS issued proposed regulations providing guidance on the portion of trust property includible in the grantor’s gross estate if the grantor has retained certain interests in the property (REG-119532-08). The retained interests covered include the use of the property and the right to an annuity, unitrust, graduated retained interest, or other payment from such property for life, for any period not ascertainable without reference to the grantor’s death, or for a period that does not in fact end before the grantor’s death.

The new proposed regulations address comments the IRS received in response to 2007 proposed regulations on the portion of trust corpus properly includible in a grantor’s gross estate under Secs. 2036 and 2039. Rather than address those comments when the earlier proposed regulations were finalized (T.D. 9414), the IRS decided instead to issue separate proposed regulations that address the comments on graduated retained interests. (For more on the final regulations, see Ransome and Satchit, “Significant Recent Developments in Estate Planning,” 39 The Tax Adviser 588 (September 2008).)

The new proposed regulations provide the method to be used to determine the portion of trust corpus includible in the grantor’s gross estate if the grantor reserves a graduated retained interest in a trust.

The portion of the corpus of a grantor-retained interest trust or a charitable remainder trust includible in the decedent’s gross estate under Sec. 2036 is that portion of the trust corpus necessary to generate a return sufficient to pay the decedent’s retained annuity, unitrust, or other payment. The proposed regulations would measure the amount of corpus needed to generate sufficient income to produce the payments that would have been due even after the decedent’s death, as if the decedent had survived and continued to receive the retained interest.

The proposed regulations provide a formula for calculating this amount and an example illustrating its computation. They also clarify the computation of the includible amount if the decedent retained the right to receive an annuity or other payment (rather than income) after the death of the current recipient of that interest.

The proposed rules would apply to estates of decedents dying on or after the date the rules are finalized.

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