TD 9555 sets forth the rules for valuing annuity interests that increase over the term of a GRAT. Under the regulations, the amount includible is the greater of: (1) the amount of corpus required to generate sufficient income to pay the annual amount due to the decedent at death, or (2) the amount of corpus required to generate sufficient income to pay the annuity, unitrust, or other payment that the decedent would have been entitled to receive if the decedent had survived the other beneficiary, reduced by the present value of the other beneficiary’s interest. Long-term GRATs with flat annuities may be more efficient than those with increasing annuities. In addition, the final Treas. Reg. §20.2036-1(c)(1)(i) is revised to provide that retained interest payments paid to a decedent’s estate after the decedent’s death are not includible under §2033 if a portion of the trust corpus is includible in the decedent’s gross estate under §2036.
When the §7520 rate is very low, a long term (99 year) GRAT may produce favorable results because an increase in the rate between creation and death will reduce the amount includible in the grantor’s estate. For example, if the section 7520 rate is 2.4%, a 99 year GRAT will zero out with an annuity of $26,536 paid annually. If the section 7520 rate were 5% when the annuitant died, then 53.072% of the GRAT would be included in the grantor’s estate. The 2012 Administration proposals would limit the maximum GRAT term to life expectancy plus 10 years.