Estate Tax Treatment of Grantor Retained Interests Clarified

Regulations

The IRS issued final regulations providing guidance on the portion of property (held in trust or otherwise) includible in the grantor’s gross estate if the grantor has retained the use of the property or the right to an annuity, unitrust, graduated retained interest, or other payment from the 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 (T.D. 9555).

The regulations provide the method required to determine the portion of the trust corpus of a grantor retained annuity trust or grantor retained unitrust that is includible in the grantor’s gross estate under Sec. 2036 if the deceased grantor retains an interest that increases annually during the term of the trust (a graduated retained interest). This method applies to graduated retained interests in transferred property whether or not held in trust.

Regs. Sec. 20.2036-1(b)(1)(ii) provides the method required to compute the amount includible in the decedent’s gross estate under Sec. 2036 in a situation where the decedent is to receive a payment (or an increased payment) after the death of another beneficiary who is receiving an annuity or other payment at the time of the decedent’s death.

The regulations also address an issue that arises when all or a portion of the trust corpus is includible in the gross estate under Sec. 2036 as a result of the decedent’s retained annuity or other interest, where double inclusion of the same asset would result if any payment that becomes payable after the decedent’s date of death to the estate also is included in the decedent’s gross estate under Sec. 2033 as a separate item. Regs. Sec. 20.2036-1(c)(1)(i) provides that payments that become payable to the decedent’s estate after the decedent’s death (as opposed to payments that are payable to the decedent prior to the decedent’s death but are not paid until after the decedent’s death) are not subject to inclusion under Sec. 2033, if Sec. 2036 is applied to include all or a portion of the trust corpus in the gross estate.

The IRS cautions that such payments must be distinguished from annuity or other payments payable to the decedent prior to the decedent’s date of death, but that are not paid until after death. The IRS said such payments are includible in the decedent’s gross estate under Sec. 2033 as a separate receivable.

The final regulations are effective November 8, 2011.