156 / How is the gift tax value of a “reversionary interest trust” measured?
A reversionary interest trust is a trust whose property will, on specified circumstances, revert to the grantor.
In a reversionary interest trust, the gift is the right to receive trust income during the trust term. The value of this right is determined and taxed in the year the trust is established. The value of the gift generally is the value of the property transferred less the value of the grantor’s retained interest.1 The value of these income and reversionary (or remainder) interests are determined using the estate and gift tax valuation tables. For example, assuming a valuation table interest rate of 7 percent and a trust term of 45 years, the value of the gift of income is 0.952387 times the value of the property (1 - 0.047613). However, if the reversionary interest is not a qualified interest, the value of the gift is generally the full value of the property transferred to the trust.
Planning Point: To avoid the above result, an annuity or unitrust interest generally should be given to the trust rather than an income interest.
1. Treas. Reg. § 25.2512-9(a)(1)(i).