Decedent Claude Focardi established
four Grantor Retained Annuity Trusts
(GRATs) – two with a two year term
and two with a four year term. Claude’s
GRATs were structured such that if he
died prior to the end of the term, his wife
would receive the annuity payments.
When a GRAT is created, the taxable
gift is reduced by the annuity value the
grantor retains. In an effort to increase
the retained annuity value (and
consequently reduce the gift tax), the
Focardi’s calculated the gift tax by
reducing the value of the gift by the
actuarial amount of a 2-life annuity.
The IRS Commissioner asserted the gift
tax amount should have been calculated
based on the actuarial amount of a single
life annuity, which would decrease the
retained annuity value and subsequently
increase the gift tax owed. Additionally,
the IRS argued the spousal interests
were not “qualified interests” because
the interests were not “fixed and
ascertainable” because they were
contingent on Claude predeceasing his
wife.
The Tax Court agreed with the IRS
Commissioner the surviving spouse’s
interest should be ignored and found the
Focardi estate deficient in federal gift
taxes.
Source: Focardi v. Commissioner of Internal
Revenue (TC Memo 2006-56, 3-27-06) &
Rubinontax.blogspot.com, 3-30-06
