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TAX CLINIC

concludes that the initial gift meets the that B survives the GRAT term. The special rule applies. Again, this is some-
de minimis exception of this proposed example confirms that since B outlived thing to keep in mind when working
regulation since it is 5% or less (in this the GRAT term, none of the GRAT with clients in managing the FLPs that
example, the value is exactly 5%) of the assets are includible in B’s gross estate, they have established or will establish.
value on the date of transfer, and as such, and the exception to the special rule This discussion offers a basic under-
the exception to the special rule doesn’t would not apply. As such, the $7 million standing of these proposed regulations.
apply. However, the special rule isn’t gift would qualify for the special rule, Although the same basic principles
relevant in this case since the gift value and a BEA of $7 million would be would apply, this discussion does not
on the date of transfer was less than the available on the Form 706 filing if B specifically address Prop. Regs. Sec.
$6.8 million BEA on the date of death. dies after Dec. 31, 2025. This conclusion 20.2010-1(c)(i)(3)(C) transfers under
If the facts were adjusted such that seems unlikely to apply much in practice Secs. 2701 and 2702, as these complex
B had already given away $10.95 mil- in the context of GRATs but might topics are beyond the scope of this
lion of other assets prior to setting up come into play more often with QPRTs discussion. In general, the examples pro-
the GRAT and thus was using the last since those normally do include a vided in the proposed regulations are not
of his $11.4 million BEA in funding it, significant taxable gift component. highly informative, and it is hoped that
the scenario would be more instructive. In addition to the GRATs, QPRTs, the final regulations will include exam-
Although it is not entirely clear in the and promissory notes described above, ples that are more applicable and explain
proposed regulations, under this modi- a couple of other common strategies are some of the distinctions more clearly.
fied fact pattern, the $450,000 would be worth mentioning as potential issues
eligible for the special rule, and it would under the reach of the exception to the Update of actuarial tables
appear the full $11.4 million BEA special rule. The first would be spousal On May 5, 2022, the IRS issued pro-
would be available for use on the Form lifetime access trusts (SLATs) that are posed regulations (REG-122770-18)
706 filing. With the trend of taxpayers deemed to be “reciprocal” in nature by labeled “Use of Actuarial Tables in
implementing “zeroed-out” GRATs the IRS. In theory, if the IRS were to Valuing Annuities, Interests for Life
almost exclusively in recent years, it fol- make the argument that SLATs set up or a Term of Years, and Remainder or
lows that, in practice, the de minimis rule by a married couple were in fact “recip- Reversionary Interests.” The proposed
would apply for most GRATs. Thus, the rocal,” the value of trust assets at death regulations’ preamble details an update
exception to the special rule under the would be “includible” in the gross estate of the IRS tables published for use in
proposed regulations really doesn’t apply of the deceased spouse. The original valuations of these types of property
to the vast majority of GRATs actu- gifts would be removed from adjusted interests under Sec. 7520, impacting
ally implemented. taxable gifts, and the BEA would be regulations across the income tax, estate
Example 5: The facts are the based on the current level at death under tax, and gift tax regimes. Sec. 7520(c)(2)
same as in Example 4, except that the the exception. This would be a terrible directs the Treasury secretary to update
taxable gift increases to $1 million. As result for a married couple who maxed the actuarial-based tables every 10 years
such, the 5% de minimis rule would not out the gifts to SLATs during the higher to take into account changes in mortal-
apply, and the exception to the special BEA term and then died after Dec. 31, ity. This is the driving factor behind the
rule does apply. What is interesting 2025. This is just another reason to be issuance of this regulation.
in this example is that it makes a careful in drafting and establishing pairs The updated Table 2010CM is
distinction between meeting the de of SLATs in the next few years. based on data from the 2010 Census
minimis exception and not meeting it The second issue would apply to gifts and replaces Table 2000CM, which has
for a GRAT. This lends credence to the of family limited partnership (FLP) been in place for the last 10-year cycle
conclusion above that the BEA would units where the donor has retained too based on the 2000 Census. The effective
appear to be available in the modified many strings attached or has operated date of the changes is the first day of the
Example 4 fact pattern. There seems to the FLP as his or her personal cash month following the adoption by Trea-
be no reason to include Example 5 if funding source even after making the sury of the proposed regulations as final
there were no distinction between the gifts. The potential result is essentially regulations. Transitional rules are also
two. the same as for the SLATs: IRS inclu- provided as follows:
Example 6: This example adjusts sion of the value of the FLP units at the ■ For gift tax purposes, if the date of
the GRAT terms from Example 4 to date of death in the deceased taxpayer’s a transfer is on or after Jan. 1, 2021,
increase the taxable gift at the time of estate and removal from adjusted tax- and before the effective date of the
transfer to $7 million and further states able gifts, such that the exception to the final regulations, the donor has the

14 August 2022 The Tax Adviser