| Improper Trust Language May Increase Gift Tax | | | | personal residences. Obviously, IRC §2702 is also |
| Liability | | | | inapplicable to incomplete gifts as well. (See IRC |
| Suppose that the grantor of a trust desires to have a | | | | §2702(a)(3)(B).) |
| right to income from a trust, either for a term certain or | | | | If the trust is either a grantor retained annuity trust |
| for life, and then pass the remainder portion to a | | | | (GRAT), or a grantor retained unitrust (GRUT), then |
| beneficiary. If the terms of the trust do not require the | | | | the interest is deemed to be a “qualified |
| grantor to retain a qualified interest, this generous | | | | interest.” If the grantor retains a qualified interest, |
| grantor may be subject to Gift Tax on the full amount | | | | then a value is assigned to the grantor’s retained |
| of the trust corpus, rather than simply the remainder | | | | interest portion. Under a GRAT, the grantor has a right |
| portion that was actually gifted-away. | | | | to receive a fixed amount of income, payable at least |
| IRC §2702(a)(2)(A) provides a “zero value” | | | | annually. Under a GRUT, the grantor has a right to |
| rule that applies to the valuation of the remainder | | | | receive a fixed percentage of the trust value, payable |
| portion of a trust whenever the grantor does not retain | | | | at least annually. This percentage can be any amount |
| a “qualified interest.” Since the value of the | | | | which is greater than zero percent (0%). |
| remainder trust portion is determined by subtracting the | | | | Proper trust drafting can easily fulfill the terms of the |
| value of the retained interest from the value of the | | | | GRAT or GRUT requirements and allow the grantor |
| entire trust, the result of this zero value rule is that | | | | to retain a right to income without incurring the wrath |
| there is nothing to subtract from the entire trust value. | | | | of IRC §2702. The advisor must ensure that the |
| The harsh result is that the entire trust is deemed a | | | | grantor has a right to more than zero percent (0%) of |
| taxable gift, rather than merely the remainder portion. | | | | the trust income, and that this income is payable at |
| Notably, this harsh zero value treatment is not | | | | least annually. The grantor must have a qualified |
| applicable to trust terms providing transfers of | | | | interest. |
| property interests which are used by the parties as | | | | |