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IRS To Make Trust Regs

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The Internal Revenue Service is seeking comments on proposed rules that would affect inclusion of trust property in the grantor’s estate.

The IRS published a draft of the regulations in a notice of proposed rulemaking that appears today in the Federal Register.

The regulations, which concern “graduated retained interests,” would provide guidance on the “portion of trust property includible in the grantor’s gross estate if the grantor has retained the use of the property, the right to an annuity, unitrust, graduated retained interest, or other payment from such property for life, for any period not ascertainable without reference to the grantor’s death, or for a period that does not in fact end before the grantor’s death,” officials write in a preamble to the draft regulations.

The proposed regulations would affect estates that file Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return.

The IRS published a draft of another set of regulations relating to the relationship between trust assets and taxable estates in July 2007.

The IRS decided to address some of the comments on the July 2007 draft in a second set of regulations, rather than in the final version of the first set.

“These proposed regulations provide the method to be used to determine the portion of trust corpus includible in the grantor’s gross estate if the grantor reserves a graduated retained interest in a trust,” officials write. “This method applies to graduated retained interests in property whether or not the property is held in trust.”

The IRS says the portion of the corpus of a grantor-retained-interest trust or a charitable remainder trust includible in the decedent’s gross estate under Section 2036 of the Internal Revenue Code “is that portion of the trust corpus necessary to generate a return sufficient to pay the decedent’s retained annuity, unitrust, or other payment. Consistent with this approach, the proposed methodology measures the amount of corpus needed to generate sufficient income to produce the payments that would have been due even after the decedent’s death, as if the decedent had survived and continued to receive the retained interest.”

The amount of corpus necessary to produce the retained graduated interest is the sum of “the amount of corpus required to generate sufficient income to pay, without reducing or invading principal, the annual amount payable to the decedent at the decedent’s death calculated” under Section 20.2036-1(c)(2)(i) of the Treasury Regulations and, for each succeeding year of the trust, “the amount of corpus required to generate sufficient income to pay, without reducing or invading principal, the increase (if any) in the annuity, unitrust, or other payment for that year, deferred until the beginning date of that increase,” officials write.

Comments on the proposed regulations are due July 29. The IRS is asking for suggestions about ways to make the proposed regulations easier to understand as well as suggestions about what the regulations would do.

A copy of the notice of proposed rulemaking appears here.