TAXES: SOME THOUGHTS
ON THE NEW LANDSCAPE AFTER EGTRRA
GRITS, GRATS, GRUTS, QPRTS, GSTT
AND OTHER ISSUES
On December 11, 2001, I’ll be giving a seminar on “Key Issues in Estate Planning and Probate in Oklahoma”, which is sponsored by the National Business Institute. These are my seminar notes, which ought to be of interest to some of the visitors to my website.
I. Shifting Value and
Transferring Interest; Overview of Federal Estate and Gift Tax Laws
A. Generation-Skipping Transfer Tax
a. Generation Skipping Transfer Tax
c. Direct Skips
f. Examples
iii. Lifetime Taxable Termination or Distribution
iv. Testamentary Taxable Termination or Distribution
g. Deductions:
Inclusions and Exclusions
h. Summary
a. Gifts
i.
Gift taxes
ii.
Income Taxes
b. Sales
i.
Life Estates
ii.
Term of Years
(a). GRITS
(b). GRATS and GRUTS
C.
Alternative Methods Of Transfer
b. Life Insurance And Other
Irrevocable Trusts
II.
Protecting The Passage Of Wealth
A.
Techniques To Decrease Transfer Taxes
e. Using ERISA
Contributions To Fund The By-Pass Trust
B.
Strategies To Reduce Income Taxes
C. Addressing The Issue Of Special Assets
a. A Brief Introduction To Discount Gifting
b. Using ERISA Assets
For Charities
I. Shifting Value and
Transferring Interest; Overview of Federal Estate and Gift Tax Laws
When Congress passed the Economic
Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), many changes were
made to the Gift and Estate Tax statutes, the most significant of which was the
repeal of estate taxes for persons dying in the year of 2010. If a wealthy person dies in 2011, however,
estate taxes must again be considered.
The “Sunset Rule” is the culprit to the legislation, and before we
consider other topics, we must first understand what the Sunset Rule is. Under a procedure enacted in 1974, rules
were established which dealt with Congressional Budgets. One of the rules, known as the Byrd Rule
(Senator Byrd from Virginia), made part of the Budget Act of 1990, permits any
member of Congress to raise a point of order against extraneous provisions
being included in a budget reconciliation bill. If reducing taxes might
increase the deficit for a fiscal year beyond the years covered by the
reconciliation matter, the law requires 60 Senators to vote in favor of the tax
legislation. Failing to attain such a vote means the tax legislation can last
no longer than 10 years.
Less than 60 Senators voted in favor
of EGTRRA, so EGTTRA will expire on December 31, 2010 (unless Congress changes
the law again). So in considering
estate taxes, we must remember that the rules have changed, but not forever.
A.
Generation-Skipping Transfer Tax
Probably the beginning point in any
Seminar on the Generation Skipping Transfer (“GST”) Tax is to begin with an
explanation of how estate taxes are computed; after this, we’ll then explain
how to compute the GST tax. To compute
Federal Estate Taxes, the gross estate is tallied, and the tax is then computed
using the tax table reproduced below on page two. Excluded from the gross estate are property interests passing to
a surviving spouse which qualify for the marital deduction.
Let’s take an example. Suppose Uncle Fred dies in 2001, and leaves his nephew as his
sole heir, and that Uncle Fred’s taxable estate is $1,500,000. Using the tax table below, one can determine
the tax to be $555,800. Let’s also
assume Uncle Fred’s estate is entitled to take the entire unified credit of
$220,550. The net tax due to the IRS is
the difference between the two, or, $335,250 ($555,800 less $335,250). IRC §2001
EGTRRA increases the amount of the unified
credit over time. Using the same
example, if Uncle Fred dies in 2004, the tax is still the same – $555,800 – but
the unified credit increases to $555,800.
Thus, the nephew will inherit $1,500,000, without paying any estate
taxes. Here is the new unified credit
table applicable to decedents (the gift tax side of the equation is dealt with
later in the outline):
Year Tax Rate Estate
Tax Exemption Estate
Credit
2002 50% $1,000,000. $345,000.
2003 49% 1,000,000. $345,000
2004 48% 1,500,000. $555,800
2005 47% 1,500,000. $555,800
2006 46% 2,000,000. $780,800
2007 45% 2,000,000. $780,800
2008 45% 2,000,000. $780,800
2009 45% 3,500,000. $1,455,800
2010 0%
2011
55%
$1,000,000. $345,000.
Here are the tax tables themselves:
|
|
|
Gift and Estate Tax Rates 2001 |
||
|
|
|
|
|
Of The |
|
|
|
|
% on |
Amount |
|
Over |
Not Over |
Pay+ |
Excess |
Over |
|
|
|
|
|
|
|
0 |
10,000 |
0 |
18 |
0 |
|
10,000 |
20,000 |
1,800 |
20 |
10,000 |
|
20,000 |
40,000 |
3,800 |
22 |
20,000 |
|
40,000 |
60,000 |
8,200 |
24 |
40,000 |
|
60,000 |
80,000 |
13,000 |
26 |
60,000 |
|
80,000 |
100,000 |
18,200 |
28 |
80,000 |
|
100,000 |
150,000 |
23,800 |
30 |
100,000 |
|
150,000 |
250,000 |
38,800 |
32 |
150,000 |
|
250,000 |
500,000 |
70,800 |
34 |
250,000 |
|
500,000 |
750,000 |
155,800 |
37 |
500,000 |
|
750,000 |
1,000,000 |
248,300 |
39 |
750,000 |
|
1,000,000 |
1,250,000 |
345,800 |
41 |
1,000,000 |
|
1,250,000 |
1,500,000 |
448,300 |
43 |
1,250,000 |
|
1,500,000 |
2,000,000 |
555,800 |
45 |
1,500,000 |
|
2,000,000 |
2,500,000 |
780,800 |
49 |
2,000,000 |
|
2,500,000 |
3,000,000 |
1,025,800 |
53 |
2,500,000 |
|
3,000,000 |
|
1,290,800 |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified Estate &
Gift Tax Credit 2001 |
|||
|
|
|
|
|
|
|
|
Unified
Credit |
Exclusion
Amount |
||
|
|
220,550 |
|
675,000 |
|
|
|
|
|
|
|
When Congress passed EGTRRA, the concept of the
“unified credit” was modified. A credit
against gift and estate taxes is available, but since Congress did not repeal
the gift taxes, changes were made relating to the credit available for gifts
(see page six of outline).
Generation Skipping Transfer Tax. Although
most financial advisors, attorneys or CPAs will never have a client whose heirs
are faced with a GST, one must still understand the concept: the tax on a GST is basically a surcharge
made for passing wealth to grandchildren (and other “skip persons”). A generation skipping transfer (GST) comes
about when 'generation-skipping' transfers are made to persons more than one
generation below the transferor's generation. The taxable event occurs in four
situations: a lifetime direct skip, a testamentary direct skip, a lifetime
taxable termination or distribution, or a testamentary termination or
distribution. Stated differently, the
tax is owed on three types of GST transfers: taxable terminations, taxable
distributions, and direct skips.
There are several concepts to consider. First, the GST rate is the maximum estate
tax rate, which is 55% through 2001, 50% in 2002, 49% in 2003, 48% in 2004, 47%
in 2005, 46% in 2006, and 45% for 2007 through 2009. Under EGTRRA, the GST is
repealed in 2010, but then is reinstated (at 55%) in 2011 (when the act
“sunsets”). IRC §§2601-2663
Second, there is a GST exemption of $1,000,000 for every
donor, which is indexed for inflation through 2003; the exemption for the year
2001 has been adjusted to $1,060,000.
Under EGTRRA, the exemption is increased to $1,500,000 in 2004 and 2005,
$2,000,000 in 2006 through 2008, and $3,500,000 in 2009. If the act sunsets in 2011, the exemption
will return to the inflation-adjusted sum of $1,000,000.
Third, since the GST is (a) a flat tax, (b) imposed
at the highest estate tax rate applicable to any transfer of property (lifetime
or death), annual gifts of $10,000 or less (the exclusion will be $11,000 in
2002; and $20,000 or $22,000, depending upon when the gift will be made, for spouses who make gifts)
should be considered as a valuable estate planning tool, since these gifts are
not subject to the GST. In addition, a
donor may also make annual “qualified transfers”, which are not subject to the
GST. Qualified transfers include:
“Qualified transfers” are not subject to any dollar
amount limitations so long as they meet the IRC §2503(e) criteria, which is the
section dealing with “qualified transfers”.
Application of GST.
With this background in
mind, let’s explore how the GST applies. There are basically three types of
generation skipping transfers:
Direct Skips – Any transfer that is subject to any estate (see IRC Chapter 11,
§§2001-2210) or gift (see IRC Chapter 12, §§2501-2524) taxes made to a skip
person. A 'skip person' is
(1) a natural person assigned to a generation
which is 2 or more generations below the generation assignment of the
transferor, or
(2) a trust—
(A)
if all interests in such trust are held by skip persons, or
(B)
if—
(i) there is no person holding an interest in such trust,
and
(ii) at no time after such transfer may a distribution (including distributions on termination) be made from such trust to a nonskip person. IRC §2613(a)
Explanatory regulation: No person holds an interest in the trust and no distributions,
other than a distribution the probability of which occurring is so remote as to
be negligible (including distributions at the termination of the trust), may be
made after the transfer to a person other than a skip person. For this purpose,
the probability that a distribution will occur is so remote as to be negligible
only if it can be ascertained by actuarial standards that there is less than a
5 percent probability that the distribution will occur. Reg § 26.2612-1(d)(2)(ii).
Taxable Termination – Any termination of an interest of any beneficiary in
a trust unless: a) a non-skip person has an interest in the property, or b) no
distribution can be made from the trust to a skip person after the termination.
Taxable Distributions – Any distribution other than a Direct Skip or a
Taxable Termination made to a skip person.
Thus, a taxable distribution is any distribution from a trust to a 'skip
person', other than a taxable termination or a direct skip. The distribution is
subject to generation-skipping transfer (GST) tax whether it is made out of
trust income or corpus.
Examples: To put some meat on the bones, so to speak, let’s
consider how this actually works.
Lifetime Direct Skips. First, assume a grandparent has an estate valued at
$25,000,000. The grandparent wants to benefit the grandchildren by giving the
grandchildren $3,000,000 (assume there is one grandchild). If the gift were
made in the year 2001, as a “lifetime direct gift”, it will take $7,207,500 of
resources to complete the gift. Here is
how the tax is computed:
The amount to be given to grandchild $3,000,000.
GST applicable rate:
55%
Estate/Gift tax rate: 55%
Computations:
GST tax ($3,000,000 x 55%)
1,650,000.
Gift Tax on Gift ($3,000,000 x 55%) 1,650,000.
Gift Tax on GSTT ($1,650,000 x 55%) 907,500.
Total Taxes 4,207,500.
To make a transfer of $3,000,000 it takes $7,207,500.
Testamentary Direct Skip. Let’s
say the same grandparent wants to leave his grandchild $3,000,000. To do this through a testamentary gift takes
$10,333,333.
Federal Taxable Estate $10,333,333.
GST applicable rate:
55%
Estate/Gift tax rate: 55%
Computations:
Federal Estate tax ($10,333,333 x 55%)
5,683,333.
Amount remaining before GSTT
5,683,333.
GSTT ($3,000,000 x 55%) 1,650,000.
Gift remaining for grandchild
3,000,000.
Lifetime Taxable Termination or Distribution. Suppose the grandparent has established an inter vivos trust, through
which a gift is made to a grandchild when a non-skip person dies (i.e., the son
of the grandparent). Assume also there
is no change in values of the trust corpus over time, and that the tax is paid
out of the property which will ultimately go to the grandchild. Here is the computation:
Beginning Amount Needed for $3,000,000 gift 10,333,333
GST applicable rate:
55%
Estate/Gift tax rate: 55%
Computations:
Federal Estate tax 3,666,666.
Amount remaining before GSTT
6,666,667.
GSTT ($6,666,667 x 55%) 3,666,667.
Gift remaining for grandchild
3,000,000.
Testamentary Taxable Termination or
Distribution. Suppose the grandparent has established a
testamentary trust, through which a gift is made to a grandchild when a
non-skip person dies (i.e., the son of the grandparent). Assume also there is no change in values of
the trust corpus over time, and that the tax is paid out of the property which
will ultimately go to the grandchild.
Here is the computation:
Beginning Amount Needed for $3,000,000 gift 14,814,814
GST applicable rate:
55%
Estate/Gift tax rate: 55%
Computations:
Federal Estate tax 8,148,148.
Amount remaining before GSTT
6,666,667.
GSTT ($6,666,667 x 55%) 3,666,667.
Gift remaining for grandchild
3,000,000.
Deductions: Inclusions and
Exclusions. Every U.S. Citizen is entitled to an exemption, IRC §2631,
which may be applied to generation skipping transfers. The question is, of course, how does this
work? A calculation must be made to
determine what can be excluded from the gift.
First, we must determine the “exclusion ratio” by dividing the total
value of the gift by the amount of the exemption.
Suppose granddad and grandma give
$4,000,000 to their grandson in 2001.
Both are entitled to deduct an annual gift exemption of $10,000, so the
net gift is $3,980,000. Now we shift
into higher math. First, divide the net
gift of $3,980,000 by the $1,060,000, which is the GST exemption permitted for
the year 2001. This produces a factor
of .26633166; subtract this number from 1, to compute the inclusion ratio
(.7337). Multiply the inclusion ratio
by the applicable maximum estate tax rate (.55 for 2001), to yield the
applicable tax rate of .4035. The tax
rate is multiplied by the gift of $3,980,000, to compute the GST tax of $1,606,000.
This
same principle applies to wills and trusts; it is advisable to give the
Executor or Successor Trustee the power to allocate the GST exemption. Here is some verbiage which permits such an
allocation:
After the decease of both Settlors, Settlors
authorize and empower the Trustee to exercise, in Trustee's sole and absolute
discretion, any elections and options given to it by any provision of the
Internal Revenue Code, and other statute or Regulation, state or federal,
governing the administration of the Settlors' estate(s) with respect to the
following:
(i). Allocating Generation-Skipping Tax Exemption.
To exercise the power to allocate any exemption from the federal tax on
generation-skipping transfers provided by IRC §2631 et. seq. to any property
with respect to which a Grantor is treated as the transferor, without regard to
whether such property is part of a Grantor's probate estate, and to exclude any
such property from such allocation.
(ii). Division of Trusts for Inclusion Ratio Under
Generation-Skipping Tax. To divide any trust created hereunder into
separate trusts in order that the inclusion ratio for federal
generation-skipping tax purposes for one such trust shall be zero or one.
With respect to the powers granted in paragraphs (i)
and (ii) and the paragraph preceding those two paragraphs, Trustee shall have
no liability for or obligation to make compensating adjustments between
principal and income or in the interests of the beneficiaries by reason of
having made or not made any such election.
Any decision made by the Trustee in good faith with respect to the
exercise or non-exercise of any such elections shall be binding and conclusive
on all interested persons.
Summary. Suffice to say, if you encounter a GST
situation, you should conduct an in-depth analysis, and do lots of
research. This portion of the outline
is only an introduction to the subject.
B. Methods Of Effectuating Lifetime
Transfers
For tax purposes, there are only two means of making lifetime transfers:
gifts and sales. Although these
categories seem airtight, as with most things in life, these classifications
are not always treated as they seem. So
let’s begin with a refresher course on gifts, then we’ll turn to sales.
There are three elements to a gift,
which are, a donor intends to make a gift, he completes the gift by delivery to
or for the donee, and the donee accepts the gift. All three elements are required in order to effectuate a
completed gift (incomplete gifts are not gifts).
Gift taxes. Once a gift has been completed, one must
consider the tax ramifications. In
Oklahoma, there are no gift taxes.
However, there are gift taxes at the federal level, and have been since
the Revenue Act of 1924. Although gift
taxes have been repealed and reenacted over the course of time, the federal
government imposes the tax as an excise tax upon the privilege of making a
transfer by gift. This tax applies to
transfers made in trust or otherwise, and to transfers, direct or indirect, of
property, be it real or personal, tangible or intangible (IRC § 2511).
For tax purposes, only completed
gifts are taxed, and control of the property is a key issue. If a “gift” is made to a revocable trust,
the grantor still has control of the trust, so the gift is considered as being
incomplete, and there are no gift tax ramifications.
Let us assume a completed gift has
been made, and gift taxes must be paid.
The gift tax rates are the same as shown on page two; the effective
exemption amount is different from estate taxes, beginning in 2004. After the repeal of estate taxes in 2010, we
still have gift taxes to pay (the rates will be the highest income tax rate,
currently scheduled to be 35%). In the
year 2010, the estate tax “step-up” in basis is repealed, which means, the
heirs of an estate will have the same tax basis as the decedent (for capital
gains purposes). There are two
exceptions – spouses leaving property to widows or widowers are entitled for a
step-up in basis, up to $4.3 million), and the first $1.3 million in assets
transferred to anyone else is entitled to a step-up in basis. Here are the new gift tax exemptions:
Year Tax Rate Gift
Tax Exemption Gift
Credit
2002 50% $1,000,000. $345,000.
2003 49% 1,000,000. $345,000
2004 48% 1,000,000. $345,000
2005 47% 1,000,000. $345,000
2006 46% 1,000,000. $345,000
2007 45% 1,000,000. $345,000
2008 45% 1,000,000. $345,000
2009 45% 1,000,000. $345,000
2010 35% 1,000,000 $345,000
2011 55% $1,000,000.
$345,000
In addition to the lifetime gift tax exemptions, donors may deduct the
annual exclusion. The gift tax annual
exclusion – $10,000 per donee, for the year 2001, $11,000 for 2002 – is not allowed for gifts of
future interests in property. A future
interest is an interest in property, where the right to use, possess, or enjoy
the property is postponed until a future date. Although a future interest may
vest immediately in the donee, it will be deemed a future interest for gift tax
purposes, if the donee cannot enjoy or use it presently. IRC § 2503(b)(1); Reg
§ 25.2503-2. Future interests include reversions, remainders, and other
interests or estates, whether vested or contingent, which do not commence in
use, possession, or enjoyment until some future time. Future interests must be
reported at their full value for gift tax purposes, but the annual exclusion
may not be used.
Income Taxes.
Once a completed gift has
been made, logic would suggest that any income derived from the gifted property
be attributed to the donee. That is not always the case. A starting point in understanding the income
tax consequences of a gift requires some knowledge of Helvering vs.
Clifford, 309 US 331 (1940). George Clifford, Jr. appointed himself as
trustee of a 5-year trust, and named his wife as beneficiary. After 5 years the trust corpus returned to
Mr. Clifford. Mr. Clifford had no right
to revoke the trust, and the trust stated the income was restricted: it could
only be used for the benefit of his wife.
When the case reached the Supreme Court, Justice Douglas held the income
was taxable to Mr. Clifford under the general definition of income, formerly
Section 22 (a) of the Revenue Act of 1934, now found in Section 61 of the
Internal Revenue Code. Justice Douglas
stated:
“So far as dominion and control were concerned, it seems clear that the trust did not effect any substantial change.”
This case created the “Clifford Doctrine”, which Congress codified in 1954. Thus, when a grantor creates a trust, in many instances the income will be attributed to the grantor (under the codified Clifford Doctrine), not the grantee. If the grantor gifts property to an irrevocable trust, income earned thereon may be attributed to the grantor. This topic will be more fully developed later in the outline.
The only other means of effecting of a conveyance, if it is not a gift,
is by a sale. The difficulty with a
sale is the seller will be subject to capital gains taxes, and may be subject
to recapture of depreciation taken on the property (which is treated as
ordinary income). If the sale is made
for inadequate consideration, the IRS might contend that it is a gift. Because sales are not really part of the
topics covered in this seminar, I will not discuss them anymore.
As a freshman in law school, I was taught that property had many
attributes, and that each attribute should be considered as a stick – and that
the characteristics of property could be analyzed as if property were simply a
bundle of sticks. With that analogy fixed in my mind, the professor then began
delineating different types of conveyances, each having different
characteristics.
We will use that analogy at this point in the
outline, because we are going to consider conveyances of property which are not
absolute conveyances; specifically, we will discuss life estates, term of
years, GRITS, QPRTs, GRATS and GRUTS. In
each instance, the conveyance made by the grantor splits the ownership
interests into something less than what the grantor owns.
A life estate is created by a conveyance, typically a deed, in which the
grantee is given an interest in property for the term of the grantee’s life;
when the grantee dies, the remainder interest then becomes vested in whomever
the grantor has named in the original conveyance. A variation of a life estate may be accomplished in a trust: the trustee is directed to retain title to
the property for the life of a person, and upon that person’s death, to convey
the remainder interest to another person (or persons).
What are the attributes of ownership, in a life
estate? The life tenant owns the
property to the exclusion of anyone else, until death. Take this example. The grantor conveys the real estate to himself, for his life or
some other life. The life tenant has
possession or enjoyment, or the right to income, during his lifetime. Upon the death of the life tenant, the
property passes to whomever is named as the remainderman. If this type of conveyance is made by deed
(not by a trust instrument), the life tenant can sell his or her interest to
someone else. The buyer in such a case
will enjoy the property so long as the seller is alive. When the seller (the life tenant) dies, the
buyer’s interest in the property ends.
Now let’s explore a technique using
life estates. During the past few years, many children are concerned about
whether they will receive an inheritance when their parents die. Their primary
fear is that the inheritance will be lost if the parent is placed in a nursing
home, when DHS pays for nursing home bills.
When the parent dies, DHS will demand reimbursement from the estate of
the decedent, dollar for dollar, for all expenses paid for by DHS.
One technique that has been used,
with limited success, is the creation of a life estate in the parent, with a
remainder interest in the children.
Using actuarial tables, it is possible to compute the value of the life
estate. Suppose a 70 year old parent
who is in a nursing home conveys his $100,000 home to himself in October of
2001 (assume an applicable Section 7520 rate of 5.8%), for life, and on his
death, the remainder goes to his son. The value of his life estate can be computed, and for your
information, is worth $49,992.
If the donor is in the nursing home, and owns a life
estate in real estate worth $49,992, DHS will not pay for nursing home
benefits, to the extent of the value of the life estate – so if a nursing home
charges $3,000 a month, DHS will not pay for benefits for 17 months ($3,000 x
17 = $51,000). After 17 months in a
nursing home, with the $3,000 a month being paid for by the parent, it would
appear that DHS would begin to pay for nursing home benefits in the 18th
month, if we assume the parent had less than $2,000 in cash assets at that
time. When the parent dies, there is no
probate of the remainder interest, since it vests immediately in the son. Under this scenario, however, the question
must be asked, who will live in the home and take care of it while the parent
is in the nursing home? If the home is
rented, then the income from the rental might disqualify the parent from DHS
assistance, if the parent’s income is too much (i.e., more than DHS permits).
Let’s not forget gift taxes: if the
life estate is worth $49,992, then the remainder interest is worth $50,008
($100,000 less $49,992). This gift is a
future interest, and will not qualify for any annual exclusion. Presumably, the parent will use part of the
lifetime gift tax credit, so the parent will not have to pay the gift tax
(which is $23,800).
Nor should we overlook federal
estate taxes: under Section 2036 of the Internal Revenue Code, all property transferred
by a decedent, in which he retains an interest for life, is included in the
gross estate of the decedent. Thus,
there are no particular estate tax benefits to creating a life estate.
Transfers which are to take effect
only at death are included in the grantor’s taxable estate, under IRC Section
2037, if the decedent retains a reversionary interest worth 5% or more of the
value of the property. In addition,
transfers made for insufficient consideration are taxable and are included in
the estate under Section 2043, and as well as revocable transfers, which are
included under Section 2038.
Although terms of years are not the sorts of things people think of,
when they are planning their estates, the concept is very similar to a lease of
real estate – however, the owner for the term of years actually owns the
property during that time. The primary
application I’ve used in creating a term of years is in a pre-nuptial
agreement, where the prospective husband will grant the prospective wife a term
of years (not to exceed her life-time), for his home (where they both will
live). The normal provision in the
ante-nuptial agreement is that if the husband dies, and the wife then remarries
or co-habits with another person of the opposite sex, the term of years will
terminate and the property will then belong to the remaindermen.
The other applications for terms of
years are things that were once very popular, but have now slipped into some disfavor,
viz., grantor retained annuity trusts, grantor retained income trusts, and
grantor retained unitrusts. In these
trusts, the grantor retains an interest in irrevocably transferred property. The remainder interest passes to the
designated beneficiaries at the end of a specified term, or the grantor’s
death. Each of these types of
conveyances deserves a bit more explanation.
GRITS. A Grantor Retained
Income Trust (GRIT) or a Qualified Personal Residence Trust (QPRT), is an
irrevocable trust, where the grantor retains an income interest in property for
a term of years. After the term of
years, the trustee conveys the remainder interest to named beneficiaries. Although there is a “future interest”
involved, viz., the portion which will be conveyed to the remainder
beneficiaries, we must nonetheless consider the gift tax aspects of a GRIT.
Stated differently, when the trust
is funded, a future gift is made. The
value of the gift is the excess of the FMV of the transferred property, less
the value of the term of years (i.e., that which is retained by the
grantor). To make such a computation,
we simply multiply the fair market value of an annuity factor times the term of
years.