Partial Interests — GRATs, GRUTs, QPRTs (Section 2702) (Portfolio 836)

Description

The Tax Management Portfolio, Partial Interests — GRATs, GRUTs, QPRTs (Section 2702), No. 836, addresses transfers of partial interests in property governed by Chapter 14. The Portfolio analyzes the rules for making transfers that will qualify for an exception to unfavorable valuation under §2702 and thus minimize transfer tax, evaluates planning options, and provides sample forms for effecting qualified transfers.

Section 2702 provides special rules to determine the amount of a gift when an individual makes a “transfer in trust” to (or for the benefit of) a “member of the individual’s family” and the individual transferor or an “applicable family member” of the transferor retains an interest in the trust. In general, if §2702 applies, the interest retained by the transferor or the family member is valued at zero so that the gift tax value of the transferred interest is equal to the full fair market value of the property. In contrast, if the transfer qualifies for an exception to §2702, as a general rule, the value of the transferor’s retained interest is calculated under regular gift tax rules and subtracted from the full fair market value of the property in determining the gift tax value of the transferred interest. If the transferor survives the retained term, the transferred property is not included in the transferor’s gross estate for estate tax purposes. Thus, a properly structured transfer may reduce transfer tax costs.

The Portfolio addresses in detail the forms of transfer that qualify for exceptions to §2702, including personal residence trusts, qualified personal residence trusts (QPRTs), grantor retained annuity trusts (GRATs), and grantor retained unitrusts (GRUTs). In addition to discussing the statutory and regulatory requirements that must be satisfied to qualify for the exceptions, the Portfolio addresses practical drafting issues and analyzes alternative planning choices that should be examined in choosing the transfer vehicle. For example, the choice between a personal residence trust and a QPRT and between a GRAT and a GRUT are discussed, as are choosing a retained term and deciding whether to obtain grantor trust status. Finally, qualified remainder interests, joint purchases and transfers of split interests, and the special rule for tangible personal property are examined.

Annotated samples of a QPRT, GRAT, GRUT, and grantor retained income trust (GRIT) (which remains effective for nonfamily transfers) appear in the Worksheets.

For detailed treatment of the other components of Chapter 14, see 835 T.M., Transfers of Interests in Family Entities Under Chapter 14: Sections 2701, 2703 and 2704.

This Portfolio may be cited as Blattmachr, Slade, and Zeydel, 836 T.M., Partial Interests — GRATs, GRUTs, QPRTs (Section 2702).

Table of Contents

I. Background to Enactment of § 2702 and Overview
II. Overview of § 2702
III. Personal Residence Trust
IV. Qualified Annuity Interest and Qualified Unitrust Interest
V. Qualified Remainder Interest
VI. Joint Purchases and Transfers of Split Interests
VII. Special Rule for Tangible Property
VIII. Double Taxation Adjustment
IX. Evaluating GRATs Against Competing Wealth Transfer Strategies