Elaine Gagliardi on Valuation of Retained Interests in Trust


In this Commentary, Elaine Gagliardi discusses proposed regulations specifying the amount to be included in the gross estate when the decedent at death retains an income, annuity or unitrust interest in a trust or the right to use a personal residence. These valuation rules apply to: GRITs, GRATs, GRUTs, CRATs, CRUTs, any other charitable remainder trust, and QPRTs or PRTs. Ms. Gagliardi writes:
 
     Example for Grantor Retained Trust for Life. Daniel creates an irrevocable trust, and directs that all trust income is paid to Daniel and his spouse, Sophia, during their joint lives and, on the death of one of them, all income is paid to the survivor. If Daniel dies before Sophia, his gross estate includes an amount of trust assets proportionate to the income interest retained, and as a result Daniel's gross estate includes the value of trust assets as of his date of death. If Daniel survives Sophia, and dies, his gross estate includes the value of all trust assets because as of his death he was entitled to all trust income [Prop. Treas Reg. § 20.2036-1(c)(1)(ii)] 2007 TNT 110-6.
 
     Example for Grantor Retained Interest Trust for Term. Denise established a 15-year grantor retained interest trust or GRIT for individuals who are not deemed to be members of Denise's family under I.R.C. § 2704(c)(2), and retained the right to receive 60 percent of the trust in-come. Denise died in year three of the GRIT term. The portion of the trust assets includible in Denise's gross estate equals 60 percent of the date of death value of all trust assets income [Prop. Treas Reg. § 20.2036-1(c)(2)(ii)] 2007 TNT 110-6.
 
     Example for Grantor Retained Annuity Trust. Doug transfers $100,000 to a grantor retained annuity trust or GRAT, and retains a $12,000 annual annuity for a 10-year term payable in monthly installments. The remainder passes to Doug's child. Doug dies during the 10-year term of the GRAT, survived by his child. As of Doug's death the trust holds $300,000 in as-sets and the I.R.C. § 7520 rate is 6 percent. The amount includible in Doug's estate equals the amount of trust assets necessary to yield the $12,000 annual annuity payment to Doug. The formula used to determine the amount includible under I.R.C. § 2036 is the annual annuity (adjusted for frequency of payments where payments occur more frequently than annually) divided by the I.R.C. § 7520 rate. The Table K adjustment factor for monthly annuity payments equals 1.0272. Assuming alternate valua-tion is not elected, Doug's gross estate includes $205,440 of trust assets determined as follows: $12,000 x 1.0272)/0.06 [Prop. Treas Reg. § 20.2036-1(c)(2)(ii)] 2007 TNT 110-6.