Rev. Rul. 84-25 — Internal Revenue Bulletin 2022-20

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.

and the transfer of a section 2701 interest within the meaning of §25.2701-5(a)(4) or a section 2702 interest within the meaning of §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 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.

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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

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).

Par. 2. Section 20.2010-1 is amended by:

Adding paragraph (c)(3); and
Revising the first sentence of paragraph (f)(2) and adding a sentence after the second sentence.

The revision and additions read as follows:

§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;

(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 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 §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 §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 §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

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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 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.

(Filed by the Office of the Federal Register on April 26, 2022, 8:45 a.m., and published in the issue of the Federal Register for April 27, 2022, 87 F.R. 24918)

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