(a) Transfers of retained interests in trust—(1) Inter vivos transfers. If an individual subsequently transfers by gift an interest in trust previously valued (when held by that individual) under § 25.2702-2 (b)(1) or (c), the individual is entitled to a reduction in aggregate taxable gifts. The amount of the reduction is determined under paragraph (b) of this section. Thus, for example, if an individual transferred property to an irrevocable trust, retaining an interest in the trust that was valued at zero under § 25.2702-2(b)(1), and the individual later transfers the retained interest by gift, the individual is entitled to a reduction in aggregate taxable gifts on the subsequent transfer. For purposes of this section, aggregate taxable gifts means the aggregate sum of the individual’s taxable gifts for the calendar year determined under section 2502(a)(1).
Ask a legal question, get an answer ASAP!
Click here to chat with a lawyer about your rights.
(2) Testamentary transfers. If either—
(i) A term interest in trust is included in an individual’s gross estate solely by reason of section 2033, or
(ii) A remainder interest in trust is included in an individual’s gross estate,
and the interest was previously valued (when held by that individual) under § 25.2702-2(b)(1) or (c), the individual’s estate is entitled to a reduction in the individual’s adjusted taxable gifts in computing the Federal estate tax payable under section 2001. The amount of the reduction is determined under paragraph (b) of this section.
(3) Gift splitting on subsequent transfer. If an individual who is entitled to a reduction in aggregate taxable gifts (or adjusted taxable gifts) subsequently transfers the interest in a transfer treated as made one-half by the individual’s spouse under section 2513, the individual may assign one-half of the amount of the reduction to the consenting spouse. The assignment must be attached to the Form 709 on which the consenting spouse reports the split gift.
(b) Amount of reduction—(1) In general. The amount of the reduction in aggregate taxable gifts (or adjusted taxable gifts) is the lesser of—
(i) The increase in the individual’s taxable gifts resulting from the interest being valued at the time of the initial transfer under § 25.2702-2(b)(1) or (c); or
(ii) The increase in the individual’s taxable gifts (or gross estate) resulting from the subsequent transfer of the interest.
(2) Treatment of annual exclusion. For purposes of determining the amount under paragraph (b)(1)(ii) of this section, the exclusion under section 2503(b) applies first to transfers in that year other than the transfer of the interest previously valued under § 25.2702-2(b)(1) or (c).
(3) Overlap with section 2001. Notwithstanding paragraph (b)(1) of this section, the amount of the reduction is reduced to the extent section 2001 would apply to reduce the amount of an individual’s adjusted taxable gifts with respect to the same interest to which paragraph (b)(1) of this section would otherwise apply.
(c) Examples. The rules of this section are illustrated by the following examples. The following facts apply for Examples 1-4:
Facts. In 1992, X transferred property to an irrevocable trust retaining the right to receive the trust income for life. On the death of X, the trust is to terminate and the trust corpus is to be paid to X’s child, C. X’s income interest had a value under section 7520 of $40,000 at the time of the transfer; however, because X’s retained interest was not a qualified interest, it was valued at zero under § 25.2702-2(b)(1) for purposes of determining the amount of X’s gift. X’s taxable gifts in 1992 were therefore increased by $40,000. In 1993, X transfers the income interest to C for no consideration.
Example 1.Assume that the value under section 7520 of the income interest on the subsequent transfer to C is $30,000. If X makes no other gifts to C in 1993, X is entitled to a reduction in aggregate taxable gifts of $20,000, the lesser of the amount by which X’s taxable gifts were increased as a result of the income interest being valued at zero on the initial transfer ($40,000) or the amount by which X’s taxable gifts are increased as a result of the subsequent transfer of the income interest ($30,000 minus $10,000 annual exclusion).Example 2.Assume that in 1993, 4 months after X transferred the income interest to C, X transferred $5,000 cash to C. In determining the increase in taxable gifts occurring on the subsequent transfer, the annual exclusion under section 2503(b) is first applied to the cash gift. X is entitled to a reduction in aggregate taxable gifts of $25,000, the lesser of the amount by which X’s taxable gifts were increased as a result of the income interest being valued at zero on the initial transfer ($40,000) or the amount by which X’s taxable gifts are increased as a result of the subsequent transfer of the income interest ($25,000 (($30,000 + $5,000)?$10,000 annual exclusion).Example 3.Assume that the value under section 7520 of the income interest on the subsequent transfer to C is $55,000. X is entitled to reduce aggregate taxable gifts by $40,000, the lesser of the amount by which X’s taxable gifts were increased as a result of the income interest being valued at zero on the initial transfer ($40,000) or the amount by which X’s taxable gifts are increased as a result of the subsequent transfer of the income interest ($55,000 minus $10,000 annual exclusion = $45,000).Example 4.Assume that X and X’s spouse, S, split the subsequent gift to C. X is entitled to assign one-half the reduction to S. If the assignment is made, each is entitled to reduce aggregate taxable gifts by $17,500, the lesser of their portion of the increase in taxable gifts on the initial transfer by reason of the application of section 2702 ($20,000) and their portion of the increase in taxable gifts on the subsequent transfer of the retained interest ($27,500?$10,000 annual exclusion).Example 5.In 1992, A transfers property to an irrevocable trust, retaining the right to receive the trust income for 10 years. On the expiration of the 10-year term, the trust is to terminate and the trust corpus is to be paid to A’s child, B. Assume that A’s term interest has a value under section 7520 of $20,000 at the time of the transfer; however, because A’s retained interest was not a qualified interest, it was valued at zero under § 25.2702-2(b)(1) for purposes of determining the amount of A’s gift. Assume also that A and A’s spouse, S, split the gift of the remainder interest under section 2513. In 1993, A transfers A’s term interest to D, A’s other child, for no consideration. A is entitled to reduce A’s aggregate taxable gifts on the transfer. Assume that A and S also split the subsequent gift to D, and that A dies one month after making the subsequent transfer of the term interest and S dies six months later. The gift of the term interest is included in A’s gross estate under section 2035(d)(2). To the extent S’s taxable gifts are reduced pursuant to section 2001(e), S is entitled to no reduction in aggregate or adjusted taxable gifts under this section.Example 6.T transfers property to an irrevocable trust retaining the power to direct the distribution of trust income for 10 years among T’s descendants in whatever shares T deems appropriate. On the expiration of the 10-year period, the trust corpus is to be paid in equal shares to T’s children. T’s transfer of the remainder interest is a completed gift. Because T’s retained interest is not a qualified interest, it is valued at zero under § 25.2702-2(b)(1) and the amount of T’s gift is the fair market value of the property transferred to the trust. The distribution of income each year is not a transfer of a retained interest in trust. Therefore, T is not entitled to reduce aggregate taxable gifts as a result of the distributions of income from the trust.Example 7.The facts are the same as in Example 6, except that after 3 years T exercises the right to direct the distribution of trust income by assigning the right to the income for the balance of the term to T’s child, C. The exercise is a transfer of a retained interest in trust for purposes of this section. T is entitled to reduce aggregate taxable gifts by the lesser of the increase in taxable gifts resulting from the application of section 2702 to the initial transfer or the increase in taxable gifts resulting from the transfer of the retained interest in trust.Example 8.In 1992, V purchases an income interest for 10 years in property in the same transaction or series of transactions in which G, V’s child, purchases the remainder interest in the same property. V dies in 1997 still holding the term interest, the value of which is includible in V’s gross estate under section 2033. V’s estate would be entitled to a reduction in adjusted taxable gifts in the amount determined under paragraph (b) of this section.[T.D. 8395, 57 FR 4272, Feb. 4, 1992]
