• Treasury Proposes Regulations Regarding Charitable Residual Retirement Trust (CRAT) Transactions –The Treasury proposed recently regulations (proposed registries) (26 CFR Part 1 (REG-108761-22) RIN 1545-BQ58) that would characterize certain CRAT investments as listed transactions, which have mandatory disclosure requirements for both participants and their advisors. Treasury issued the proposed rules in response to the investment of CRATs in a single immediate premium pension (SPIA). In these situations, beneficiary taxpayers report the annuity payment received from the CRAT as if the beneficiary of the CRAT is the direct owner of the SPIA. As an annuity payment under Section 72 of the Internal Revenue Code, the recipient reports a portion of it as ordinary income and the rest (a majority) as a return of principal.

The Internal Revenue Service has found that some of the included CRATs may deviate from the approved sample CRAT forms it publishes, which may violate certain requirements of IRC Section 664, meaning the trust does not qualify like CRAT. Assuming the trust involved in the transaction qualifies as a CRAT, the proposed rules list the transaction because the Internal Revenue Service asserts that the ordinary tiered income rules of IRC section 662 apply to the reinvestment of sales proceeds by the CRAT – in an SPIA. These rules tax the pension payment to the recipient in tiers: first as ordinary income, then accumulated capital gains, then other income, then tax-free corpus.

The proposed rules require participants and advisors to report the transaction if:

1. The concessionaire establishes a CRAT under Article 664 and finances it with assessed property;
2. The trustee sells the CRAT's property;
3. Some or all of the income is used to purchase an annuity; AND
4. On a federal income tax return, the beneficiary reports the amount payable by the trust as if it were, in whole or in part, an annuity payment subject to section 72, so it does not pass the income to the beneficiary according to the income levels ordinary and capital gains under section 664(b).

The proposed rules impose various penalties if disclosures are not made.

• IRS releases its 2025 revenue proposals—The IRS has released its revenue proposals, noting its policy priorities in the area of ​​estates and gifts, many of which carry over from previous years:

• Changing the generation pass-through transfer tax (GST) rules applicable to trusts that are designated as non-pass-through persons because they include a charitable beneficiary.
• Implementation of rules to limit the structure of payments for charitable annuity funds (CLAT) to avoid deferral of charitable payments at the expense of the charity.
• Treatment of loans to beneficiaries of GST trusts as distributions for GST and income tax purposes.
• A minimum residual value of 25% and a term of 10 years is required for grantor-retained annuity funds (GRATs), among other types of trusts.
• Prohibition of deducting the estate tax value of promissory notes issued at the applicable federal minimum rate for income tax purposes.
• Treatment of carried interests as ordinary income.
• Prohibiting gain deferral on the exchange of real property used in a trade or business under the like-kind exchange rules and instead treating exchange gains in excess of a certain threshold as sales.

• The US Supreme Court refuses to hear United States v. Paulson case of assets –In the well-publicized case of US v. Paulson (May 17, 2023), reported in previous issues, the IRS sued the estate and trust for over $10 million in unpaid estate taxes and imposed liability on the individual beneficiaries under IRC Section 6324(a)(2).

The IRC imposes a gross estate and personal liability lien on six listed categories of persons “who receive or own property.” The six categories are: (1) spouses, (2) transferees (not including bona fide purchasers), (3) trustees, (4) surviving tenants, (5) persons in possession through the exercise of a power of appointment, and ( 6) beneficiaries. The district court granted motions to dismiss under federal law for trustees and those defendants who did not own property of the estate at the date of death. In May 2023, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's decision, holding that the statute imposes personal liability on persons who own the estate at the date of death AND who receive real estate on or after the date of death for the amount of unpaid estate tax on that estate. The estate filed a petition for writ of certiorari with the Supreme Court. Concurrently, the beneficiaries asked the district court to certify on remand the amount of the estate tax liability, arguing that the assets had been depreciated and the estate tax now exceeded the value of the estate's assets. The Supreme Court declined to hear the case, presumably because it was sent to the district court for the determination of the appropriate estate tax.

• The private letter ruling determines the tax consequences of corporate transaction gifts—In PLR 202406001 (February 9, 2024), the taxpayer requested a determination of the gift tax consequences of an equity reorganization. An executive had previously formed several trusts and GRATs that held shares of A Stock and B Stock in the Company. A limited liability company (LLC) was created for a specific business purpose (not described in the PLR). The company and a disregarded entity wholly owned Sh.PK. The company and its Board approved a share repurchase program where executives and trusts would contribute shares of A and B stock to the company, which would then retire those shares and issue new shares of
C stock in LLC. As part of the plan, the executive and the trusts planned to sign a contribution agreement under which they would contribute a proportionate number of shares back to the company. The LLC would then use the cash flowing from the C Stock for a business purpose.

A transfer of property from a shareholder of a company to a corporation is a gift to the other shareholders, unless it is made in the ordinary course of business, which means it is in good faith, at arm's length, and without charitable intent. In that case, the transfer is deemed to have been made for adequate and full consideration in money or money's worth.

The IRS held that the agreement applied to transfers that met these requirements. First, the entire structure of the agreement was for business purposes. Second, the executor and the trusts acted in their own interests and the non-contributing shareholders were not connected to the executor or the trusts. Thus, indirect transfers resulting from stock contributions increased the value of the non-contributing stockholders but were not gifts because they were made in the ordinary course of business.

As between the executive and the trusts, transfers made by the executive increased the value of the shares held by the trusts, but the same was true for transfers made by the trusts to the executive. Because they contributed an equal share of their shares, the value each contributed will equal the value each received. Therefore, those indirect transfers were not gifts either.

Separately, the IRS held that the stock exchange did not interfere with a GRAT that qualified under IRC Section 2702. The question was whether the contribution of stock to the Company would be characterized as a transfer to the executive annuitant, which would violate the GRAT. GRAT correctly prohibits any distribution to the annuitant other than qualified annuity interest. The contribution of shares in the company resulted in an indirect transfer from the GRAT to the executive (as the annuitant) and an indirect transfer to the non-contributing shareholders (as the remainder). The IRS held that those transfers were indeed a reinvestment of GRAT assets, not an addition to the GRAT or a specific distribution to the executive annuitant.