[Federal Register Volume 87, Number 81 (Wednesday, April 27, 2022)]
[Proposed Rules]
[Pages 24918-24923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08865]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[REG-118913-21]
RIN 1545-BQ22


Estate and Gift Taxes; Limitation on the Special Rule Regarding a 
Difference in the Basic Exclusion Amount

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the Estate Tax 
Regulations relating to the basic exclusion amount (BEA) applicable to 
the computation of Federal estate and gift taxes. The proposed 
regulations affect the estates of decedents dying after a reduction in 
the BEA who made certain types of gifts after 2017 and before a 
reduction in the BEA.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 26, 2022. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-118913-21) by following the online instructions for submitting 
comments. Once submitted to the Federal eRulemaking Portal, comments 
cannot be edited or withdrawn. The IRS expects to have limited 
personnel available to process public comments that are submitted on 
paper through the mail. Until further notice, any comments submitted on 
paper will be considered to the extent practicable. The Department of 
the Treasury (Treasury Department) and the IRS will publish for public 
availability any comment submitted electronically, and to the extent 
practicable on paper, to its public docket. Send paper submissions to: 
CC:PA:LPD:PR (REG-118913-21), Room 5203, Internal Revenue Service, P.O. 
Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John D. MacEachen at (202) 317-6859; concerning submissions of 
comments, the public hearing, and the access code to attend the hearing 
by telephone, Regina Johnson at (202) 317-5177 (not toll-free numbers) 
or by sending an email to <a href="/cdn-cgi/l/email-protection#afffdacdc3c6ccc7caceddc6c1c8dcefc6dddc81c8c0d9"><span class="__cf_email__" data-cfemail="acfcd9cec0c5cfc4c9cddec5c2cbdfecc5dedf82cbc3da">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Background

    Section 11061 of the Tax Cuts and Jobs Act, Public Law 115-97, 131 
Stat. 2054, 2091 (2017) (TCJA), amended section 2010(c)(3) of the 
Internal Revenue Code (Code) to provide that, for decedents dying and 
gifts made after December 31, 2017, and before January 1, 2026, the BEA 
is increased by $5 million to $10 million as adjusted for inflation 
(increased BEA). Under the TCJA, on January 1, 2026, the BEA will 
revert to $5 million as adjusted for inflation.
    Section 11061 of the TCJA also added new section 2001(g)(2) to the 
general statute of the Code that imposes the Federal estate tax. 
Section 2001(g)(2) grants the Secretary of the Treasury or her delegate 
(Secretary) authority to prescribe such regulations as may be necessary 
or appropriate to carry out section 2001 with respect to any difference 
between the BEA applicable at the time of a decedent's death and the 
BEA applicable with respect to any gifts made by the decedent. This 
specific authority is in addition to the Secretary's preexisting 
authority under section 2010(c)(6) to prescribe such regulations as may 
be necessary or appropriate to carry out section 2010(c).
    On November 26, 2019, the Treasury Department and the IRS published 
final regulations under section 2010 (TD 9884) in the Federal Register 
(84 FR 64995) to address situations described in section 2001(g)(2) 
(final regulations). The final regulations adopted Sec.  20.2010-1(c), 
a special rule (special rule) applicable in cases where the credit 
against the estate tax that is attributable to the BEA is less at the 
date of death than the sum of the credits attributable to the BEA 
allowable in computing gift tax payable within the meaning of section 
2001(b)(2) with regard to the decedent's lifetime gifts. In such cases, 
the portion of the credit against the net tentative estate tax that is 
attributable to the BEA is based on the sum of the credits attributable 
to the BEA allowable in computing gift tax payable regarding the 
decedent's lifetime gifts. The rule ensures that the estate of a donor 
is not taxed on completed gifts that, as a result of the increased BEA, 
were free of gift tax when made. The preamble to the final regulations 
stated that further consideration would be given to the issue of 
whether gifts that are not true inter vivos transfers, but rather are 
includible in the gross estate, should be excepted from the special 
rule, and that any proposal addressing this issue would benefit from 
notice and comment.
    This document contains proposed amendments to the Estate Tax 
Regulations (26 CFR part 20) relating to the BEA described in section 
2010(c)(3) of the Code (proposed regulations), for which purpose the 
final regulations reserved Sec.  20.2010-1(c)(3). The special rule 
currently does not distinguish between: (i) Completed gifts that are 
treated as adjusted taxable gifts for estate tax purposes and that, by 
definition, are not included in the donor's gross estate; and (ii) 
completed gifts that are treated as testamentary transfers for estate 
tax purposes and are included in the donor's gross estate (includible 
gift). The Code and the regulations, however, do distinguish between 
these two types of transfers. Section 2001(b) (flush language) excludes 
from the term ``adjusted taxable gifts'' gifts that are includible in 
the gross estate. Section 2701(e)(6) and Sec.  25.2701-5 similarly 
remove from adjusted taxable gifts transfers includible in the gross 
estate that previously were subject to the special valuation rules of 
section 2701. See also Sec.  25.2702-6 (excluding from adjusted taxable 
gifts certain transfers includible in the gross estate that previously 
were subject to the special valuation rules of section 2702) and Rev. 
Rul. 84-25, 1984-1 C.B. 191 (excluding from adjusted taxable gifts 
completed transfers that will be satisfied with assets includible in 
the gross estate). In keeping with the statutory distinction between 
completed gifts that are treated as adjusted taxable gifts and 
completed gifts that are treated as testamentary transfers, these 
proposed regulations generally would deny the benefit of the special 
rule to includible gifts.
    Regardless of whether a gift is treated as an adjusted taxable gift 
or as an includible gift for estate tax purposes,

[[Page 24919]]

the Code ensures that the gift is treated consistently with respect to 
the credits allowable in the year in which the gift was made. See 
discussion of the five statutory steps of the estate tax computation in 
part III, Federal Estate Tax Computation Generally, in the Background 
section of the preamble to the notice of proposed rulemaking under 
section 2010 (REG-106706-18) published in the Federal Register (83 FR 
59343) on November 23, 2018. The exclusion from adjusted taxable gifts 
of transfers includible in the gross estate does not affect the second 
step of the estate tax computation, the determination of a hypothetical 
gift tax referred to as the gift tax payable. Gift tax payable is based 
upon all post-1976 taxable gifts, whether or not included in the gross 
estate. See sections 2001(b)(2) and (g)(1), requiring the determination 
of a hypothetical gift tax on all post-1976 taxable gifts, which is a 
gift tax reduced, but not to below zero, by the credit amounts 
allowable in the years of the gifts. Both the hypothetical gift tax and 
the credit amounts are computed using the gift tax rates in effect at 
the date of death. Thus, for purposes of computing the estate tax, an 
includible gift receives credit for all credit amounts, including those 
attributable to the increased BEA, allowable in the years in which the 
gift was made.
    A commenter recommended consideration of whether the special rule 
should apply to taxable gifts made during an increased BEA period that 
are essentially testamentary and thus are included in the gross estate 
rather than in adjusted taxable gifts. See discussion in part 6, Anti-
Abuse Rule, of the Summary of Comments and Explanation of Revisions in 
the final regulations. If such transfers are subject to the special 
rule, they can be made in a manner designed to make the increased BEA 
available against the donor's estate tax despite the fact that the 
donor has retained the beneficial use of or the control of the 
transferred property. Examples of such transfers include gifts subject 
to a retained life estate or subject to other powers or interests as 
described in sections 2035 through 2038 and 2042 of the Code, gifts 
made by enforceable promise as described in Rev. Rul. 84-25, supra, and 
gifts subject to the special valuation rules of sections 2701 and 2702. 
In recommending an exception to the special rule, the commenter 
cautioned that attention should also be given to the potential to work 
around an exception that relies solely on whether gifts are includible 
in the gross estate. For example, a donor may attempt to make the 
increased BEA available against the estate tax under the special rule 
by the removal shortly before the donor's death of the donor's 
beneficial use of or the control of the transferred property. Examples 
of these types of transfers include the elimination by a third party, 
shortly before the donor's death, of the interests or powers that 
otherwise would have resulted in the inclusion of the transferred 
interest or property in the donor's gross estate; the payment shortly 
before death of a gift made by enforceable promise as described in Rev. 
Rul. 84-25, supra; and the transfer shortly before death of a section 
2701 interest within the meaning of Sec.  25.2701-5(a)(4) or a section 
2702 interest within the meaning of Sec.  25.2702-6(a)(1).
    The purpose of the special rule is to ensure that bona fide inter 
vivos transfers of property are consistently treated as a transfer of 
property by gift for both gift and estate tax purposes. Bona fide inter 
vivos gifts are subject to the gift tax based on the values, gift tax 
rates, and exclusions applicable as of the date of the gift. While such 
a gift is treated as an adjusted taxable gift for purposes of 
determining the estate tax rate to be applied to the value of the 
taxable estate, the gift is not includible in the donor's gross estate 
at death and is not subject to the estate tax. The special rule avoids 
the imposition of the estate tax on the gift by ensuring that the 
gifted property is treated solely as an adjusted taxable gift and not 
also as property includible in the gross estate.
    Unlike an adjusted taxable gift, however, a gift of property that 
is includible in the donor's gross estate is subject to estate tax 
based on the values, estate tax rates, and exclusions applicable as of 
the date of death. The Code itself ensures that an includible gift is 
not treated as both an adjusted taxable gift and an inclusion in the 
gross estate. See section 2001(b) (flush language), excluding from 
``adjusted taxable gifts'' gifts that are includible in the gross 
estate. The Code also ensures that an includible gift receives credit 
for any credit amounts allowable in the years in which the gift was 
made. See sections 2001(b)(2) and (g)(1). The treatment of an 
includible gift for estate tax purposes results in the correct outcome 
without any application of the special rule: The property is included 
in the gross estate and subject to the BEA in effect at the donor's 
death.
    There is a subset of includible gifts that the Code treats in a 
different fashion, but still in a way that results in the correct 
outcome without the application of the special rule. That subset 
consists of gifts made during an increased BEA period that are 
essentially testamentary, but the entire value of which is deductible 
for gift tax purposes by reason of the charitable or marital deduction 
(or both). Such transfers are excluded from adjusted taxable gifts 
because they never were taxable gifts in the first place. See section 
2503(a), defining taxable gifts as the total amount of gifts made 
during the calendar year less the deductions provided in sections 2522 
and 2523 for charitable and marital gifts, respectively. As a result of 
the exclusion of charitable and marital gifts from taxable gifts, and 
thus from adjusted taxable gifts, there would be no credits allocable 
to these gifts attributable to the BEA in computing gift tax payable 
within the meaning of section 2001(b)(2). Because no BEA is applicable 
to the deductible gifts, there will be no difference between the BEA 
applicable to these gifts attributable to the increased BEA and the BEA 
applicable to the decedent's estate. As a result, there is no 
possibility of inconsistent gift and estate taxation of such an 
includible gift, and thus no need for the application of the special 
rule.
    Without additional rules, however, the application of the special 
rule to includible gifts results in securing the benefit of the 
increased BEA in circumstances where the donor continues to have the 
title, possession, use, benefit, control, or enjoyment of the 
transferred property during life. In those circumstances, there is no 
possibility of the inclusion of the gift in adjusted taxable gifts at 
the death of the donor, and therefore no need for the application of 
the special rule to transfers of such property. In those circumstances, 
it is appropriate that the amount includible or treated as includible 
as part of the gross estate (rather than as an adjusted taxable gift) 
is subject to estate tax with the benefit of only the BEA available at 
the date of death. Section 2001(g)(2) directs the Secretary to 
prescribe such regulations as may be necessary or appropriate to carry 
out section 2001 with respect to any difference between the BEA 
applicable at the time of the decedent's death and the BEA applicable 
with respect to any gifts made by the decedent. Given the plain 
language of the Code describing the computation of the estate tax and 
directing that certain transfers, including transfers made within three 
years of death that otherwise would have been includible in the gross 
estate, are treated as testamentary transfers and not as adjusted 
taxable gifts, it would be inappropriate to apply the special rule

[[Page 24920]]

to includible gifts. This is particularly true where the inter vivos 
transfers are not true bona fide transfers in which the decedent 
``absolutely, unequivocally, irrevocably, and without possible 
reservations, parts with all of his title and all of his possession and 
all of his enjoyment of the transferred property.'' Commissioner v. 
Church's Estate, 335 U.S. 632, 645 (1949). To prevent this 
inappropriate result, these proposed regulations would create an 
exception to the special rule applicable to includible gifts.
    The same commenter suggested that any exception to the special rule 
relating to transfers within the scope of section 2701 be specifically 
addressed in Sec.  25.2701-5. This suggestion is not adopted. Section 
25.2701-5(a)(3) provides rules under which the estate of a decedent who 
made a transfer subject to section 2701 may reduce the decedent's 
adjusted taxable gifts in a manner similar to that of section 2001(b) 
so as to eliminate the amount duplicated in the transfer tax base. The 
amount of the reduction in adjusted taxable gifts is determined under 
Sec.  25.2701-5(b). See also Sec.  25.2702-6(b), providing a similar 
rule for certain interests previously subject to section 2702. Both 
Sec. Sec.  25.2701-5 and 25.2702-6 address only the amount of adjusted 
taxable gifts but, with the exception of Sec.  25.2701-5(e)(3), do not 
address the amount of the credits allowable in the multiple steps 
necessary to determine the estate tax. As previously discussed, the 
effect of the estate tax computation is to provide the decedent the 
benefit of any credit amounts allowable in the years of the gifts, 
determined at date of death gift tax rates, including the credit amount 
attributable to a section 2701 or 2702 transfer that was free of gift 
tax when made as a result of the increased BEA, regardless of whether 
the amount of adjusted taxable gifts is later reduced for estate tax 
purposes. Thus, while a reduction in the amount of adjusted taxable 
gifts eliminates amounts duplicated in the transfer tax base, it 
neither changes the existence of the transfer nor frees up the credit 
allocable to that transfer. See, e.g., the Background section of the 
preamble to Adjustments Under Special Valuation Rules (TD 8536), 
published in the Federal Register (59 FR 23152) on May 5, 1994, 
explaining that the Sec.  25.2701-5 regulations do not ``purge'' a 
section 2701 transfer as if it had not occurred, but rather mitigate 
the effect of double taxation through a reduction in a decedent's 
adjusted taxable gifts.
    As noted earlier, Sec.  25.2701-5(e)(3) permits an adjustment to 
both the adjusted taxable gifts and gift tax payable of a consenting 
spouse. In the case of an election under section 2513 to split a 
section 2701 transfer with the donor's spouse, a later testamentary 
transfer of the section 2701 interest is treated as made solely by the 
donor spouse. The consenting spouse's adjusted taxable gifts and gift 
tax payable are each reduced to eliminate any remaining effect of the 
section 2701 interest on the consenting spouse in a manner that is 
generally consistent with the principles of sections 2001(d) and (e) 
(pertaining to the treatment of split gifts in the computation of the 
estate tax). This exception has no application to the donor spouse, who 
remains subject to the general rule of Sec.  25.2701-5(a)(3). Thus, it 
is not necessary to address differences in the BEA in either Sec.  
25.2701-5 or Sec.  25.2702-6(b).

Explanation of Provisions

    Pursuant to sections 2010(c)(6) and 2001(g)(2) of the Code, the 
proposed regulations would add proposed Sec.  20.2010-1(c)(3) to 
provide an exception to the special rule for transfers that are 
includible in the gross estate or are treated as includible in the 
gross estate for purposes of section 2001(b), including for example 
gifts subject to a retained life estate or subject to other powers or 
interests as described in sections 2035 through 2038 and 2042 of the 
Code regardless of whether the transfer was deductible pursuant to 
section 2522 or 2523, gifts made by enforceable promise, and other 
amounts that are duplicated in the transfer tax base, including a 
section 2701 interest within the meaning of Sec.  25.2701-5(a)(4) and a 
section 2702 interest within the meaning of Sec.  25.2702-6(a)(1). The 
exception to the special rule also would apply to transfers that would 
be described in the preceding sentence but for the transfer, 
elimination, or relinquishment within 18 months of the donor's date of 
death of the interest or power that would have caused inclusion in the 
gross estate, effectively allowing the donor to retain the enjoyment of 
the property for life. In addition to transfers, eliminations, or 
relinquishments by the donor, examples include the elimination, by a 
third party having the power to eliminate or extinguish the interest or 
power, of the interests or powers that otherwise would have resulted in 
inclusion of transferred property in the donor's gross estate; the 
payment of a gift made by enforceable promise as described in Rev. Rul. 
84-25, supra; and the transfer of a section 2701 interest within the 
meaning of Sec.  25.2701-5(a)(4) or a section 2702 interest within the 
meaning of Sec.  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

[[Page 24921]]

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.

Comments and Request for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely (in the manner described under the ADDRESSES 
heading) to the IRS. The Treasury Department and the IRS request 
comments on all aspects of the proposed regulations. Any electronic 
comments submitted, and to the extent practicable any paper comments 
submitted, will be made available at https://www.regulations.gov or 
upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a hearing are strongly encouraged to be submitted electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Statement of Availability of IRS Documents

    Rev. Rul. 84-25, 1984-1 C.B. 191, and 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.

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

0
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).
* * * * *
0
Par. 2. Section 20.2010-1 is amended by:
0
1. Adding paragraph (c)(3); and
0
2. Revising the first sentence of paragraph (f)(2) and adding a 
sentence after the second sentence.
    The revision and additions read as follows:


Sec.  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;
    (C) Transfers described in Sec.  25.2701-5(a)(4) or Sec.  25.2702-
6(a)(1) of this chapter; and
    (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

[[Page 24922]]

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 Sec.  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 Sec.  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 Sec.  
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 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

[[Page 24923]]

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.
[FR Doc. 2022-08865 Filed 4-26-22; 8:45 am]
BILLING CODE 4830-01-P


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