In a recent case before the Tax Court, the remainder interests of a couple's grantor retained annuity trusts (GRATs) must be valued based on a single-life annuity, not a dual-life annuity.

Mr. And Mrs. Schott each created a GRAT. Each GRAT allowed for fixed annuity payments equal to 11.54% of the initial fair market value of the contributed assets. The term was for 15 years, and if the grantor died before the end of the term, the grantor's spouse would receive the remaining annuity payments. On their gift tax returns, the couple valued their retained interests as dual-life annuities, thereby increasing the value of the retained interests and decreasing the value of the taxable gifts (the remainder interests).

Unfortunately, the IRS determined that the remainder interests in the GRATs should be valued based on single-life annuities, and the Tax Court agreed. The problem with the Schotts' GRATs is that the spouse's retained interest is not a qualified interest because it is not fixed and ascertainable at the inception of the GRAT. Not only is each spousal interest contingent on the spouse surviving the grantor, it is also subject to revocation by the grantor, and must therefore be valued at zero.

GRATs are great estate planning tools, but as with any tool, if you don't know how to use it, you get the advice of someone who does. Be sure to consult an expert estate planning attorney before creating a GRAT or using any other estate planning tool.