Instead, it looked at the factors originally used to allocate the expenses of a trust to the account of a remainderperson
(the capital beneficiary) as opposed to those allocated to the account of a life beneficiary (the income beneficiary).
Under IRC Section 2702, the grantor is treated as though he transferred the entire property to the remainderperson
at the time of the creation of the GRIT since his retained income interest is valued at zero (except with respect to the personal residence exception or unless the remainderperson
is not a member of the transferor's family).
Treasury regulations permit the transfer of trust principal or excess income to the charitable remainderperson
prior to the conclusion of the measuring term of the trust.
The transferor retains the right to fixed payments (the annuity) for the term, and the assets (if any) remaining in the trust at the end of the term pass to the intended donee (remainderperson
) without any additional gift tax.
The IRS has privately ruled that the donor/unitrust recipient of a CRUT could donate his entire unitrust interest in an existing CRUT to the charitable remainderperson
in consideration for a gift annuity that would be payable to him.
At the time of the transfer, the value of the gift is determined by the value of the remainder interest in the residence calculated using actuarial tables (i.e., the value of the property is discounted for the fact that it will not be available to the remainderperson
for many years).
Because there will be a larger value from which to determine the individual's unitrust payments in retirement, and because additional distributions can be recouped from the NIMCRUT's make-up account, supplemental income from the NIMCRUT can be maximized without an adverse impact on the amount ultimately passing to the charitable remainderperson
In the ruling, the IRS stated, "[u]nder this provision, a grantor will not make an additional gift to a remainderperson
in situations in which a grantor is treated as the owner of a trust under [Sec.] 671 through [Sec.] 679, and the income of the trust exceeds the amount required to satisfy the annuity payable to the grantor ....
Where still viable, it is important that the sales contract for a RIT involving the retention of a life estate require that the purchaser (the remainderperson
) pay full and adequate consideration for the remainder interest (there is a split in the courts regarding whether adequate consideration should be measured by the remainder interest or by the value of the entire property).
(4) Qualified tangible property is tangible property (1) for which a depreciation or depletion allowance would not be allowable if the property were used in a trade or business or held for the production of income, and (2) as to which the nonexercise of any rights under the term interest would not affect the value of the property passing to the remainderperson
. A de minimis exception is provided at the time of the transfer to trust for improvements to the property which would be depreciable provided such improvements do not exceed 5% of the fair market value of the entire property.
The gift tax cost is exactly the same as if the grantor had made a direct gift of the property to the remainderpersons
. In place of a GRIT, the grantor retained unitrust (GRUT) and the grantor retained annuity trust (GRAT) are available to leverage gifts between generations.
The first people to receive distributions are called "primary beneficiaries." The class of beneficiaries who receives what remains when a trust terminates are called "remainderpersons