Page 32 - TaxAdviser_Jan_Apr23_Neat

ESTATES, TRUSTS & GIFTS

organizations would preemptively its proportional share of the fair market between (a) 10 years and (b) the life ex-
seek a ruling from the IRS that the value (FMV) of the whole property. pectancy of the annuitant plus 10 years.
transaction was not an indirect self- Recognition events would include The minimum-value requirement would
dealing transaction. transfers of property: eliminate the ability to create a GRAT
Under Rev. Proc. 2021-40, the IRS ■ Into a trust and distributions in-kind that does not have gift tax consequences,
will not issue letter rulings on whether from a trust, except for a grantor severely limiting its usefulness in an
an act of self-dealing occurs when a pri- trust that is wholly owned and estate plan.
vate foundation, or other entity subject revocable by the donor; and The prohibition of decreasing annu-
to Sec. 4941, owns or receives an interest ■ To and by a partnership or other ity payments would eliminate the “front-
in an LLC or other entity that owns a noncorporate entity, if the transfers loading” of GRATs with other assets so
promissory note issued by a disqualified are effectively a gift to the transferee. that more of the main asset that is the
person. Rev. Proc. 2021-40 explains that Generally, and with certain excep- target for using the GRAT is preserved
the IRS is “currently reviewing its prior tions, the distribution of an asset from a for the remainder beneficiary of the
ruling position on [these] transactions.” revocable grantor trust would cause the GRAT. The required minimum term
The new revenue procedure applies to deemed owner of the trust to recognize of the GRAT would make a GRAT a
all letter requests pending in or received gain on any unrealized appreciation riskier planning technique because the
by the IRS on or after Sept. 3, 2021. in the value of the asset. Unrealized transfer tax benefits of GRATs are typi-
appreciation in the value of the asset cally achieved when the grantor outlives
Administration budgetary would be realized at the deemed owner’s the GRAT term. The required maxi-
proposals would affect trusts, death or any other time when the trust mum term of the GRAT would prevent
estates, and gifts becomes irrevocable. 99-year GRATs that some taxpayers
On March 28, 2022, President Joe Biden Available deferral elections would have created so that the amount includ-
released his proposed federal budget⁶ allow taxpayers to: ible in the grantor’s estate under Sec.
for fiscal 2023, which included proposed ■ Elect not to recognize unrealized 2036 is very small.
changes to the rules for taxing certain appreciation of certain family-owned Impose income tax on transfers
individuals, estates, and trusts, as well and -operated businesses until the between a grantor and a grantor
as broadening the circumstances under business is sold or is no longer trust: For a trust that is not fully revo-
which capital gains become taxable. family-owned and -operated; and cable by a deemed owner, this provision
Treat gifts or bequests of ap- ■ Pay the tax imposed on appreciated would treat the transfer of an asset for
preciated property as realization assets transferred at death by ap- consideration between a grantor trust
events: This provision would cause plying a 15-year fixed-rate payment and its deemed owner as a potentially
capital gain to be realized at the time plan, unless the assets are liquid or a taxable transaction. The seller would rec-
of the transfer for appreciated property business made a deferral election. ognize gain on any appreciation in the
transferred by gift or bequest. For trans- Modifying the GRAT rule: This value of the transferred asset. Further,
fers at death, a maximum of $3,000 in provision would modify the rules the proposal would treat the payment of
capital losses and carryforwards could for grantor retained annuity trusts income tax on the income of a grantor
be claimed against ordinary income on (GRATs) by (1) requiring a minimum trust as a gift occurring on Dec. 31 of
the decedent’s final income tax return, value for gift tax purposes of the the year in which the income tax is paid,
and any capital gains tax realized would GRAT’s remainder interest — the unless the trust reimburses the deemed
be deductible on the estate tax return. greater of (a) 25% of the value of the owner during the same year. This provi-
A trust, partnership, or other noncor- assets transferred to the GRAT, or (b) sion would supersede Rev. Rul. 85-13
porate entity owning property that has $500,000; (2) prohibiting any decrease (disregarding sales and exchanges be-
not been the subject of a recognition in the annuity during the GRAT term; tween a grantor and his or her grantor
event in the last 90 years would also be (3) prohibiting the grantor from acquir- trust for income tax purposes) and make
required to recognize gain on unrealized ing in an exchange an asset held in the sales and the satisfaction of obligations
appreciation. Generally, a transferred trust without recognizing gain or loss; with appreciated property (including in-
partial interest would be valued based on and (4) requiring the GRAT term to be kind payments of annuity and unitrust

6. Budget of the U.S Government: Fiscal Year 2023; with revenue measures described in Treasury’s General Explanations of the Administration’s Fiscal Year 2023
Revenue Proposals (Greenbook).

30 January 2023 The Tax Adviser