[Federal Register Volume 87, Number 81 (Wednesday, April 27, 2022)]
[Proposed Rules]
[Pages 24918-24923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08865]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[REG-118913-21]
RIN 1545-BQ22
Estate and Gift Taxes; Limitation on the Special Rule Regarding a
Difference in the Basic Exclusion Amount
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed amendments to the Estate Tax
Regulations relating to the basic exclusion amount (BEA) applicable to
the computation of Federal estate and gift taxes. The proposed
regulations affect the estates of decedents dying after a reduction in
the BEA who made certain types of gifts after 2017 and before a
reduction in the BEA.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 26, 2022. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at https://www.regulations.gov (indicate IRS and
REG-118913-21) by following the online instructions for submitting
comments. Once submitted to the Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The IRS expects to have limited
personnel available to process public comments that are submitted on
paper through the mail. Until further notice, any comments submitted on
paper will be considered to the extent practicable. The Department of
the Treasury (Treasury Department) and the IRS will publish for public
availability any comment submitted electronically, and to the extent
practicable on paper, to its public docket. Send paper submissions to:
CC:PA:LPD:PR (REG-118913-21), Room 5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John D. MacEachen at (202) 317-6859; concerning submissions of
comments, the public hearing, and the access code to attend the hearing
by telephone, Regina Johnson at (202) 317-5177 (not toll-free numbers)
or by sending an email to [email protected].
SUPPLEMENTARY INFORMATION:
Background
Section 11061 of the Tax Cuts and Jobs Act, Public Law 115-97, 131
Stat. 2054, 2091 (2017) (TCJA), amended section 2010(c)(3) of the
Internal Revenue Code (Code) to provide that, for decedents dying and
gifts made after December 31, 2017, and before January 1, 2026, the BEA
is increased by $5 million to $10 million as adjusted for inflation
(increased BEA). Under the TCJA, on January 1, 2026, the BEA will
revert to $5 million as adjusted for inflation.
Section 11061 of the TCJA also added new section 2001(g)(2) to the
general statute of the Code that imposes the Federal estate tax.
Section 2001(g)(2) grants the Secretary of the Treasury or her delegate
(Secretary) authority to prescribe such regulations as may be necessary
or appropriate to carry out section 2001 with respect to any difference
between the BEA applicable at the time of a decedent's death and the
BEA applicable with respect to any gifts made by the decedent. This
specific authority is in addition to the Secretary's preexisting
authority under section 2010(c)(6) to prescribe such regulations as may
be necessary or appropriate to carry out section 2010(c).
On November 26, 2019, the Treasury Department and the IRS published
final regulations under section 2010 (TD 9884) in the Federal Register
(84 FR 64995) to address situations described in section 2001(g)(2)
(final regulations). The final regulations adopted Sec. 20.2010-1(c),
a special rule (special rule) applicable in cases where the credit
against the estate tax that is attributable to the BEA is less at the
date of death than the sum of the credits attributable to the BEA
allowable in computing gift tax payable within the meaning of section
2001(b)(2) with regard to the decedent's lifetime gifts. In such cases,
the portion of the credit against the net tentative estate tax that is
attributable to the BEA is based on the sum of the credits attributable
to the BEA allowable in computing gift tax payable regarding the
decedent's lifetime gifts. The rule ensures that the estate of a donor
is not taxed on completed gifts that, as a result of the increased BEA,
were free of gift tax when made. The preamble to the final regulations
stated that further consideration would be given to the issue of
whether gifts that are not true inter vivos transfers, but rather are
includible in the gross estate, should be excepted from the special
rule, and that any proposal addressing this issue would benefit from
notice and comment.
This document contains proposed amendments to the Estate Tax
Regulations (26 CFR part 20) relating to the BEA described in section
2010(c)(3) of the Code (proposed regulations), for which purpose the
final regulations reserved Sec. 20.2010-1(c)(3). The special rule
currently does not distinguish between: (i) Completed gifts that are
treated as adjusted taxable gifts for estate tax purposes and that, by
definition, are not included in the donor's gross estate; and (ii)
completed gifts that are treated as testamentary transfers for estate
tax purposes and are included in the donor's gross estate (includible
gift). The Code and the regulations, however, do distinguish between
these two types of transfers. Section 2001(b) (flush language) excludes
from the term ``adjusted taxable gifts'' gifts that are includible in
the gross estate. Section 2701(e)(6) and Sec. 25.2701-5 similarly
remove from adjusted taxable gifts transfers includible in the gross
estate that previously were subject to the special valuation rules of
section 2701. See also Sec. 25.2702-6 (excluding from adjusted taxable
gifts certain transfers includible in the gross estate that previously
were subject to the special valuation rules of section 2702) and Rev.
Rul. 84-25, 1984-1 C.B. 191 (excluding from adjusted taxable gifts
completed transfers that will be satisfied with assets includible in
the gross estate). In keeping with the statutory distinction between
completed gifts that are treated as adjusted taxable gifts and
completed gifts that are treated as testamentary transfers, these
proposed regulations generally would deny the benefit of the special
rule to includible gifts.
Regardless of whether a gift is treated as an adjusted taxable gift
or as an includible gift for estate tax purposes,
[[Page 24919]]
the Code ensures that the gift is treated consistently with respect to
the credits allowable in the year in which the gift was made. See
discussion of the five statutory steps of the estate tax computation in
part III, Federal Estate Tax Computation Generally, in the Background
section of the preamble to the notice of proposed rulemaking under
section 2010 (REG-106706-18) published in the Federal Register (83 FR
59343) on November 23, 2018. The exclusion from adjusted taxable gifts
of transfers includible in the gross estate does not affect the second
step of the estate tax computation, the determination of a hypothetical
gift tax referred to as the gift tax payable. Gift tax payable is based
upon all post-1976 taxable gifts, whether or not included in the gross
estate. See sections 2001(b)(2) and (g)(1), requiring the determination
of a hypothetical gift tax on all post-1976 taxable gifts, which is a
gift tax reduced, but not to below zero, by the credit amounts
allowable in the years of the gifts. Both the hypothetical gift tax and
the credit amounts are computed using the gift tax rates in effect at
the date of death. Thus, for purposes of computing the estate tax, an
includible gift receives credit for all credit amounts, including those
attributable to the increased BEA, allowable in the years in which the
gift was made.
A commenter recommended consideration of whether the special rule
should apply to taxable gifts made during an increased BEA period that
are essentially testamentary and thus are included in the gross estate
rather than in adjusted taxable gifts. See discussion in part 6, Anti-
Abuse Rule, of the Summary of Comments and Explanation of Revisions in
the final regulations. If such transfers are subject to the special
rule, they can be made in a manner designed to make the increased BEA
available against the donor's estate tax despite the fact that the
donor has retained the beneficial use of or the control of the
transferred property. Examples of such transfers include gifts subject
to a retained life estate or subject to other powers or interests as
described in sections 2035 through 2038 and 2042 of the Code, gifts
made by enforceable promise as described in Rev. Rul. 84-25, supra, and
gifts subject to the special valuation rules of sections 2701 and 2702.
In recommending an exception to the special rule, the commenter
cautioned that attention should also be given to the potential to work
around an exception that relies solely on whether gifts are includible
in the gross estate. For example, a donor may attempt to make the
increased BEA available against the estate tax under the special rule
by the removal shortly before the donor's death of the donor's
beneficial use of or the control of the transferred property. Examples
of these types of transfers include the elimination by a third party,
shortly before the donor's death, of the interests or powers that
otherwise would have resulted in the inclusion of the transferred
interest or property in the donor's gross estate; the payment shortly
before death of a gift made by enforceable promise as described in Rev.
Rul. 84-25, supra; and the transfer shortly before death of a section
2701 interest within the meaning of Sec. 25.2701-5(a)(4) or a section
2702 interest within the meaning of Sec. 25.2702-6(a)(1).
The purpose of the special rule is to ensure that bona fide inter
vivos transfers of property are consistently treated as a transfer of
property by gift for both gift and estate tax purposes. Bona fide inter
vivos gifts are subject to the gift tax based on the values, gift tax
rates, and exclusions applicable as of the date of the gift. While such
a gift is treated as an adjusted taxable gift for purposes of
determining the estate tax rate to be applied to the value of the
taxable estate, the gift is not includible in the donor's gross estate
at death and is not subject to the estate tax. The special rule avoids
the imposition of the estate tax on the gift by ensuring that the
gifted property is treated solely as an adjusted taxable gift and not
also as property includible in the gross estate.
Unlike an adjusted taxable gift, however, a gift of property that
is includible in the donor's gross estate is subject to estate tax
based on the values, estate tax rates, and exclusions applicable as of
the date of death. The Code itself ensures that an includible gift is
not treated as both an adjusted taxable gift and an inclusion in the
gross estate. See section 2001(b) (flush language), excluding from
``adjusted taxable gifts'' gifts that are includible in the gross
estate. The Code also ensures that an includible gift receives credit
for any credit amounts allowable in the years in which the gift was
made. See sections 2001(b)(2) and (g)(1). The treatment of an
includible gift for estate tax purposes results in the correct outcome
without any application of the special rule: The property is included
in the gross estate and subject to the BEA in effect at the donor's
death.
There is a subset of includible gifts that the Code treats in a
different fashion, but still in a way that results in the correct
outcome without the application of the special rule. That subset
consists of gifts made during an increased BEA period that are
essentially testamentary, but the entire value of which is deductible
for gift tax purposes by reason of the charitable or marital deduction
(or both). Such transfers are excluded from adjusted taxable gifts
because they never were taxable gifts in the first place. See section
2503(a), defining taxable gifts as the total amount of gifts made
during the calendar year less the deductions provided in sections 2522
and 2523 for charitable and marital gifts, respectively. As a result of
the exclusion of charitable and marital gifts from taxable gifts, and
thus from adjusted taxable gifts, there would be no credits allocable
to these gifts attributable to the BEA in computing gift tax payable
within the meaning of section 2001(b)(2). Because no BEA is applicable
to the deductible gifts, there will be no difference between the BEA
applicable to these gifts attributable to the increased BEA and the BEA
applicable to the decedent's estate. As a result, there is no
possibility of inconsistent gift and estate taxation of such an
includible gift, and thus no need for the application of the special
rule.
Without additional rules, however, the application of the special
rule to includible gifts results in securing the benefit of the
increased BEA in circumstances where the donor continues to have the
title, possession, use, benefit, control, or enjoyment of the
transferred property during life. In those circumstances, there is no
possibility of the inclusion of the gift in adjusted taxable gifts at
the death of the donor, and therefore no need for the application of
the special rule to transfers of such property. In those circumstances,
it is appropriate that the amount includible or treated as includible
as part of the gross estate (rather than as an adjusted taxable gift)
is subject to estate tax with the benefit of only the BEA available at
the date of death. Section 2001(g)(2) directs the Secretary to
prescribe such regulations as may be necessary or appropriate to carry
out section 2001 with respect to any difference between the BEA
applicable at the time of the decedent's death and the BEA applicable
with respect to any gifts made by the decedent. Given the plain
language of the Code describing the computation of the estate tax and
directing that certain transfers, including transfers made within three
years of death that otherwise would have been includible in the gross
estate, are treated as testamentary transfers and not as adjusted
taxable gifts, it would be inappropriate to apply the special rule
[[Page 24920]]
to includible gifts. This is particularly true where the inter vivos
transfers are not true bona fide transfers in which the decedent
``absolutely, unequivocally, irrevocably, and without possible
reservations, parts with all of his title and all of his possession and
all of his enjoyment of the transferred property.'' Commissioner v.
Church's Estate, 335 U.S. 632, 645 (1949). To prevent this
inappropriate result, these proposed regulations would create an
exception to the special rule applicable to includible gifts.
The same commenter suggested that any exception to the special rule
relating to transfers within the scope of section 2701 be specifically
addressed in Sec. 25.2701-5. This suggestion is not adopted. Section
25.2701-5(a)(3) provides rules under which the estate of a decedent who
made a transfer subject to section 2701 may reduce the decedent's
adjusted taxable gifts in a manner similar to that of section 2001(b)
so as to eliminate the amount duplicated in the transfer tax base. The
amount of the reduction in adjusted taxable gifts is determined under
Sec. 25.2701-5(b). See also Sec. 25.2702-6(b), providing a similar
rule for certain interests previously subject to section 2702. Both
Sec. Sec. 25.2701-5 and 25.2702-6 address only the amount of adjusted
taxable gifts but, with the exception of Sec. 25.2701-5(e)(3), do not
address the amount of the credits allowable in the multiple steps
necessary to determine the estate tax. As previously discussed, the
effect of the estate tax computation is to provide the decedent the
benefit of any credit amounts allowable in the years of the gifts,
determined at date of death gift tax rates, including the credit amount
attributable to a section 2701 or 2702 transfer that was free of gift
tax when made as a result of the increased BEA, regardless of whether
the amount of adjusted taxable gifts is later reduced for estate tax
purposes. Thus, while a reduction in the amount of adjusted taxable
gifts eliminates amounts duplicated in the transfer tax base, it
neither changes the existence of the transfer nor frees up the credit
allocable to that transfer. See, e.g., the Background section of the
preamble to Adjustments Under Special Valuation Rules (TD 8536),
published in the Federal Register (59 FR 23152) on May 5, 1994,
explaining that the Sec. 25.2701-5 regulations do not ``purge'' a
section 2701 transfer as if it had not occurred, but rather mitigate
the effect of double taxation through a reduction in a decedent's
adjusted taxable gifts.
As noted earlier, Sec. 25.2701-5(e)(3) permits an adjustment to
both the adjusted taxable gifts and gift tax payable of a consenting
spouse. In the case of an election under section 2513 to split a
section 2701 transfer with the donor's spouse, a later testamentary
transfer of the section 2701 interest is treated as made solely by the
donor spouse. The consenting spouse's adjusted taxable gifts and gift
tax payable are each reduced to eliminate any remaining effect of the
section 2701 interest on the consenting spouse in a manner that is
generally consistent with the principles of sections 2001(d) and (e)
(pertaining to the treatment of split gifts in the computation of the
estate tax). This exception has no application to the donor spouse, who
remains subject to the general rule of Sec. 25.2701-5(a)(3). Thus, it
is not necessary to address differences in the BEA in either Sec.
25.2701-5 or Sec. 25.2702-6(b).
Explanation of Provisions
Pursuant to sections 2010(c)(6) and 2001(g)(2) of the Code, the
proposed regulations would add proposed Sec. 20.2010-1(c)(3) to
provide an exception to the special rule for transfers that are
includible in the gross estate or are treated as includible in the
gross estate for purposes of section 2001(b), including for example
gifts subject to a retained life estate or subject to other powers or
interests as described in sections 2035 through 2038 and 2042 of the
Code regardless of whether the transfer was deductible pursuant to
section 2522 or 2523, gifts made by enforceable promise, and other
amounts that are duplicated in the transfer tax base, including a
section 2701 interest within the meaning of Sec. 25.2701-5(a)(4) and a
section 2702 interest within the meaning of Sec. 25.2702-6(a)(1). The
exception to the special rule also would apply to transfers that would
be described in the preceding sentence but for the transfer,
elimination, or relinquishment within 18 months of the donor's date of
death of the interest or power that would have caused inclusion in the
gross estate, effectively allowing the donor to retain the enjoyment of
the property for life. In addition to transfers, eliminations, or
relinquishments by the donor, examples include the elimination, by a
third party having the power to eliminate or extinguish the interest or
power, of the interests or powers that otherwise would have resulted in
inclusion of transferred property in the donor's gross estate; the
payment of a gift made by enforceable promise as described in Rev. Rul.
84-25, supra; and the transfer of a section 2701 interest within the
meaning of Sec. 25.2701-5(a)(4) or a section 2702 interest within the
meaning of Sec. 25.2702-6(a)(1). For purposes of the preceding
sentence, such transfers, eliminations, and relinquishments include
those effectuated by the donor, the donor in conjunction with any other
person, or by any other person, but do not include those effectuated by
the expiration of the period described in the original instrument of
transfer, whether by a death or the lapse of time.
The special rule, however, would continue to apply to transfers
includible in the gross estate when the taxable amount of the gift is
not material, that is, the taxable amount is 5 percent or less of the
total amount of the transfer, valued as of the date of the transfer.
Compare section 2037(a)(2), excluding from the gross estate property
subject to a reversionary interest where the value of such interest
immediately before death is 5 percent or less of the value of the
transferred property; and section 2042(2), excluding from the term
``incidents of ownership'' reversionary interests where the value of
such interest immediately before death is 5 percent or less of the
value of the life insurance policy. See also section 673(a), treating
the grantor as the owner for income tax purposes of any portion of a
trust in which the grantor's reversionary interest exceeds 5 percent of
the value of such portion as of the date of inception of that portion
of the trust. This bright-line exception to the special rule is
proposed in lieu of a facts and circumstances determination of whether
a particular transfer was intended to take advantage of the increased
BEA without depriving the donor of the use and enjoyment of the
property.
The proposed exception to the special rule may be illustrated by
the following example. Assume that when the BEA was $11.4 million, a
donor gratuitously transferred the donor's enforceable $9 million
promissory note to the donor's child. The transfer constituted a
completed gift of $9 million. On the donor's death, the assets that are
to be used to satisfy the note are part of the donor's gross estate,
with the result that the note is treated as includible in the gross
estate for purposes of section 2001(b). Thus, the $9 million gift is
excluded from adjusted taxable gifts in computing the tentative estate
tax under section 2001(b)(1). Nonetheless, if the donor dies after a
statutory reduction in the BEA to $6.8 million, the credit to be
applied in computing the estate tax is the credit based upon the $6.8
million of the BEA allowable as of the date of death.
Applicability Date
Once these regulations have been published as final regulations, it
is
[[Page 24921]]
proposed that these regulations be applicable to the estates of
decedents dying on or after April 27, 2022. The special rule will not
be needed until the basic exclusion amount has been decreased by
statute; under current law, that is scheduled to occur for the estates
of decedents dying after 2025. However, if such a decrease is enacted
on or after April 27, 2022 but before the issuance of final
regulations, the best way to ensure that all estates will be subject to
the same rules is to make this proposed exception to the special rule
applicable to the estates of decedents dying on or after April 27,
2022.
Special Analyses
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
These proposed regulations apply to donors of gifts made after 2017 and
to the estates of donors dying after a reduction in the BEA, and
implement a change in the amount that is excluded from estate tax.
Neither an individual nor the estate of a deceased individual is a
small entity within the meaning of 5 U.S.C. 601(6). Accordingly, a
regulatory flexibility analysis is not required.
Pursuant to section 7805(f) of the Code, this regulation has been
submitted to the Chief Counsel for the Office of Advocacy of the Small
Business Administration for comment on its impact on small business.
Comments and Request for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments that
are submitted timely (in the manner described under the ADDRESSES
heading) to the IRS. The Treasury Department and the IRS request
comments on all aspects of the proposed regulations. Any electronic
comments submitted, and to the extent practicable any paper comments
submitted, will be made available at https://www.regulations.gov or
upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a hearing are strongly encouraged to be submitted electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Statement of Availability of IRS Documents
Rev. Rul. 84-25, 1984-1 C.B. 191, and Announcement 2020-4, 2020-17
IRB 1, are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at https://www.irs.gov.
Drafting Information
The principal author of these proposed regulations is John D.
MacEachen, Office of the Associate Chief Counsel (Passthroughs and
Special Industries). Other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 20 is proposed to be amended as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
0
Par. 1. The authority citation for part 20 continues to read in part as
follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 20.2010-1 also issued under 26 U.S.C. 2001(g)(2) and 26
U.S.C. 2010(c)(6).
* * * * *
0
Par. 2. Section 20.2010-1 is amended by:
0
1. Adding paragraph (c)(3); and
0
2. Revising the first sentence of paragraph (f)(2) and adding a
sentence after the second sentence.
The revision and additions read as follows:
Sec. 20.2010-1 Unified credit against estate tax; in general.
* * * * *
(c) * * *
(3) Exception to the special rule--(i) Transfers to which the
special rule does not apply. Except as provided in paragraph (c)(3)(ii)
of this section, the special rule of paragraph (c) of this section does
not apply to transfers includible in the gross estate, or treated as
includible in the gross estate for purposes of section 2001(b),
including without limitation the following transfers:
(A) Transfers includible in the gross estate pursuant to section
2035, 2036, 2037, 2038, or 2042, regardless of whether all or any part
of the transfer was deductible pursuant to section 2522 or 2523;
(B) Transfers made by enforceable promise to the extent they remain
unsatisfied as of the date of death;
(C) Transfers described in Sec. 25.2701-5(a)(4) or Sec. 25.2702-
6(a)(1) of this chapter; and
(D) Transfers that would have been described in paragraph
(c)(3)(i)(A), (B), or (C) of this section but for the transfer,
relinquishment, or elimination of an interest, power, or property,
effectuated within 18 months of the date of the decedent's death by the
decedent alone, by the decedent in conjunction with any other person,
or by any other person.
(ii) Transfers to which the special rule continues to apply.
Notwithstanding paragraph (c)(3)(i) of this section, the special rule
of paragraph (c) of this section applies to the following transfers:
(A) Transfers includible in the gross estate in which the value of
the taxable portion of the transfer, determined as of the date of the
transfer, was 5 percent or less of the total value of the transfer; and
(B) Transfers, relinquishments, or eliminations described in
paragraph (c)(3)(i)(D) of this section effectuated by the termination
of the durational period described in the original instrument of
transfer by either the mere passage of time or the death of any person.
(iii) Examples. In each example, the basic exclusion amount on the
date of the gift was $11.4 million, the basic exclusion amount on the
date of death is $6.8 million, and both amounts include hypothetical
inflation adjustments. The donor's executor does not elect to use the
alternate valuation date and, unless otherwise stated, the donor never
married and made no other gifts during life.
(A) Example 1. Individual A made a completed gift of A's promissory
note in the amount of $9 million. The note remained unpaid as of the
date of A's death. The assets that are to be used to satisfy the note
are part of A's gross estate, with the result that the note is treated
as includible in the gross estate for purposes of section 2001(b) and
is not included in A's adjusted taxable
[[Page 24922]]
gifts. Because the note is treated as includible in the gross estate
and does not qualify for the 5 percent de minimis rule in paragraph
(c)(3)(ii)(A) of this section, the exception to the special rule found
in paragraph (c)(3) of this section applies to the gift of the note.
The credit to be applied for purposes of computing A's estate tax is
based on the $6.8 million basic exclusion amount as of A's date of
death, subject to the limitation of section 2010(d). The result would
be the same if A or a person empowered to act on A's behalf had paid
the note within the 18 months prior to the date of A's death.
(B) Example 2. Assume that the facts are the same as in paragraph
(c)(3)(iii)(A) of this section (Example 1) except that A's promissory
note had a value of $2 million and, on the same date that A made the
gift of the promissory note, A also made a gift of $9 million in cash.
The cash gift was paid immediately, whereas the $2 million note
remained unpaid as of the date of A's death. The assets that are to be
used to satisfy the note are part of A's gross estate, with the result
that the note is treated as includible in the gross estate for purposes
of section 2001(b) and is not included in A's adjusted taxable gifts.
Because the $2 million note is treated as includible in the gross
estate and does not qualify for the 5 percent de minimis rule in
paragraph (c)(3)(ii)(A) of this section, the exception to the special
rule found in paragraph (c)(3) of this section applies to the gift of
the note. On the other hand, the $9 million cash gift was paid
immediately, and no portion of that gift is includible or treated as
includible in the gross estate. Because the amount allowable as a
credit in computing the gift tax payable on A's $9 million cash gift
exceeds the credit based on the $6.8 million basic exclusion amount
allowable on A's date of death, the special rule of paragraph (c) of
this section applies to that gift. The credit to be applied for
purposes of computing A's estate tax is based on a basic exclusion
amount of $9 million, the amount used to determine the credit allowable
in computing the gift tax payable on A's $9 million cash gift.
(C) Example 3. Assume that the facts are the same as in paragraph
(c)(3)(iii)(A) of this section (Example 1) except that, prior to A's
gift of the note, the executor of the estate of A's predeceased spouse
elected, pursuant to Sec. 20.2010-2, to allow A to take into account
the predeceased spouse's $2 million DSUE amount. Assume further that
A's promissory note had a value of $2 million on the date of the gift,
and that A made a gift of $9 million in cash a few days later. The cash
gift was paid immediately, whereas the $2 million note remained unpaid
as of the date of A's death. The assets that are to be used to satisfy
the note are part of A's gross estate, with the result that the note is
treated as includible in the gross estate for purposes of section
2001(b) and is not included in A's adjusted taxable gifts. Because A's
DSUE amount was sufficient to shield the gift of the note from gift
tax, no basic exclusion amount was applicable to the $2 million gift
pursuant to paragraph (c)(1)(ii)(A) of this section and the special
rule of paragraph (c) of this section does not apply to that gift. On
the other hand, the $9 million cash gift was paid immediately, and no
portion of that gift is includible or treated as includible in the
gross estate. Because the amount allowable as a credit in computing the
gift tax payable on A's $9 million cash gift exceeds the credit based
on the $6.8 million basic exclusion amount allowable on A's date of
death, the special rule of paragraph (c) of this section applies to
that gift. The credit to be applied for purposes of computing A's
estate tax is based on A's $11 million applicable exclusion amount,
consisting of the $2 million DSUE amount plus the $9 million amount
used to determine the credit allowable in computing the gift tax
payable on A's $9 million cash gift.
(D) Example 4. Individual B transferred $9 million to a grantor
retained annuity trust (GRAT), retaining a qualified annuity interest
within the meaning of Sec. 25.2702-3(b) of this chapter valued at
$8,550,000. The taxable portion of the transfer valued as of the date
of the transfer was $450,000. B died during the term of the GRAT. The
entire GRAT corpus is includible in the gross estate pursuant to Sec.
20.2036-1(c)(2). Because the value of the taxable portion of the
transfer was 5 percent or less of the total value of the transfer
determined as of the date of the gift, the 5 percent de minimis rule in
paragraph (c)(3)(ii)(A) of this section is met and the exception to the
special rule found in paragraph (c)(3) of this section does not apply
to the gift. However, because the total of the amounts allowable as a
credit in computing the gift tax payable on B's post-1976 gift of
$450,000 is less than the credit based on the $6.8 million basic
exclusion amount allowable on B's date of death, the special rule of
paragraph (c) of this section does not apply to the gift. The credit to
be applied for purposes of computing B's estate tax is based on the
$6.8 million basic exclusion amount as of B's date of death, subject to
the limitation of section 2010(d).
(E) Example 5. Assume that the facts are the same as in paragraph
(c)(3)(iii)(D) of this section (Example 4) except that B's qualified
annuity interest is valued at $8 million. The taxable portion of the
transfer valued as of the date of the transfer was $1 million. Because
the value of the taxable portion of the transfer was more than 5
percent of the total value of the transfer determined as of the date of
the gift, the 5 percent de minimis rule in paragraph (c)(3)(ii)(A) of
this section is not met and the exception to the special rule found in
paragraph (c)(3) of this section applies to the gift. The credit to be
applied for purposes of computing B's estate tax is based on the $6.8
million basic exclusion amount as of B's date of death, subject to the
limitation of section 2010(d).
(F) Example 6. Assume that the facts are the same as in paragraph
(c)(3)(iii)(D) of this section (Example 4) except that B's qualified
annuity interest is valued at $2 million. The taxable portion of the
transfer valued as of the date of the transfer was $7 million. B
survived the term of the GRAT. Because B survived the original
unaltered term of the GRAT, no part of the value of the assets
transferred to the GRAT is includible in B's gross estate, and the
exception to the special rule found in paragraph (c)(3) of this section
does not apply to the gift. Moreover, because the amount allowable as a
credit in computing the gift tax payable on B's $7 million gift exceeds
the credit based on the $6.8 million basic exclusion amount allowable
on B's date of death, the special rule of paragraph (c) of this section
applies to the gift. The credit to be applied for purposes of computing
B's estate tax is based on a basic exclusion amount of $7 million, the
amount used to determine the credit allowable in computing the gift tax
payable on B's transfer to the GRAT.
(G) Example 7. Individual C transferred $9 million to a grantor
retained income trust (GRIT), retaining an income interest valued at $0
pursuant to section 2702(a)(2)(A). The taxable portion of the transfer
valued as of the date of the transfer was $9 million. C died during the
term of the GRIT. The entire GRIT corpus is includible in C's gross
estate pursuant to section 2036(a)(1) because C retained the right to
receive all of the income of the GRIT. Because the transferred assets
are includible in the gross estate and do not qualify for the 5 percent
de minimis rule in paragraph (c)(3)(ii)(A) of this section, the
exception to the special rule found in paragraph (c)(3) of this section
[[Page 24923]]
applies to the gift. The credit to be applied for purposes of computing
C's estate tax is based on the $6.8 million basic exclusion amount as
of C's date of death, subject to the limitation of section 2010(d).
* * * * *
(f) * * *
(2) Exceptions. Except as specifically provided in this paragraph
(f)(2), paragraphs (c) and (e)(3) of this section apply to estates of
decedents dying on or after November 26, 2019. * * * Paragraph (c)(3)
of this section is applicable to the estates of decedents dying on or
after April 27, 2022.
* * * * *
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-08865 Filed 4-26-22; 8:45 am]
BILLING CODE 4830-01-P