Focardi: Cook-Ed, Not Schott

Abstract

This article discusses the recent Focardi Tax Court opinion that denies grantor retained annuity trust (GRAT) qualification for a grantor's retained interest with a revocable spousal interest contingent on both the grantor's death within the term and on the grantor's decision not to revoke his spouse's interest. Because of the disqualification, the grantor's retained interest can not reduce the value of his gift for gift tax purposes.

In so ruling, the Tax Court re-iterated its position in Cook and explicitly rejected the Ninth Circuit's opinion in Schott. The article, however, explains why by allowing a contingency within the grantor's control but by disallowing a contingency outside his power, the regulations undermine the prohibition against contingencies and why, within this context, Schott makes more sense than Cook.

Keywords: GRAT, 2702, valuation, gift tax, Focardi, Cook, Schott