The Internal Revenue Service (IRS) is pursuing a married couple for over $736.63 million in gift taxes and penalties, questioning their use of Grantor Retained Annuity Trusts (GRAT) to transfer wealth to the next generation in a manner that is allegedly not in compliance with tax laws.
According to case summaries compiled by Bessemer Trust, the IRS sent tax notices to the Elcan couple on December 18, 2024, demanding total gift taxes of $613,859,989 and penalties of $122,771,998, amounting to a total of $736,631,987. As the couple chose to file their gift taxes jointly, both individuals are considered donors in this case.
The Elcan couple filed a lawsuit against the IRS on March 14, 2025, and one of them submitted a motion for partial summary judgment on October 1, 2025. The court has not reached a decision on this matter as reported by financial media outlet Kiplinger.
The case summaries indicate that Mrs. Elcan established three two-year GRATs in 2018, transferring equity in the family’s investment holding company to the trusts. The combined assets of the first two trusts amounted to approximately $6.875 billion.
Under the design of such trusts, an annuity, or “income,” is paid to the individual each year by the trust. Additionally, the trust terms permit the individual to swap out assets of equivalent value for the assets in the trust.
Mrs. Elcan exercised this right multiple times. She used promissory notes, which are IOUs acknowledging repayment with interest in the future, to exchange for equity and cash within the trust. When it came time for the trust to pay her the annuity, the trust then returned these promissory notes to her as part of the annuity payment.
The IRS asserts in the tax notices that these trusts do not meet the tax-saving conditions set forth in Section 2702 of the Tax Code. According to the regulation, the annuities received annually by the contributors can be deducted from the gift amount; however, the IRS contends that the annuity arrangement in this case is not compliant, thus all assets initially transferred into the trust should be treated as gifts subject to full taxation.
Additionally, the IRS argues that even if the court does not accept the above interpretation, the transactions where Mrs. Elcan exchanged promissory notes for trust assets should be considered taxable gifts. Moreover, the IRS deems that both spouses showed negligence or disregard for the provisions, warranting an additional 20% penalty.
Citing court documents, Kiplinger reports that the IRS points out that Treasury Department rules expressly prohibit the payment of annuities in GRATs using promissory notes. The IRS believes that the series of events where personal promissory notes were exchanged into the trust and then back to the contributors through the trust indirectly circumvents this prohibition when viewed collectively.
If the IRS’s position is supported by the court, the approximately $6.875 billion initially transferred into the trust might be fully considered taxable gifts.
In their motion, the Elcan couple argues that their annuity interests align with the clear definition in Section 2702 and the additional requirements outlined in Treasury Department rules are inconsistent with statutory law. They contend that based on the Supreme Court’s ruling in the “Loper Bright case,” the rules should be deemed invalid.
Furthermore, they emphasize that the trust never “issued” any promissory notes to pay the annuities, but rather used assets already held within the trust, specifically promissory notes previously issued by the contributors, to fulfill payment obligations, thus not violating any relevant regulations.
GRATs are irrevocable trusts where assets are placed, and the contributors receive a fixed amount annually for a set number of years.
The key tax advantage of such trusts lies in the monthly benchmark interest rate published by the IRS (Section 7520 rate, commonly known as the “hurdle rate”), used to estimate how much the contributors may receive. If the trust’s assets appreciate beyond this threshold, the excess at the end of the trust term can be transferred directly to beneficiaries such as children without incurring gift taxes; however, if the asset growth is not sufficient, after the contributors receive their annuity, there may be little left in the trust, effectively returning the original funds to the contributors.
According to Bessemer Trust’s calculations in the case summary, following the exchange for promissory notes, approximately $131 million plus interests in the first two trusts can be retained for beneficiaries; however, the third trust failed to even meet the second-year annuity payment, leaving no assets for beneficiaries in the end.
The outcome of the Tax Court’s ruling could impact other taxpayers utilizing similar strategies for estate planning and clarify whether contributors can exchange promissory notes for trust assets. Bessemer Trust’s summary indicates the IRS is currently reviewing other GRAT cases with controversies surrounding asset valuation appropriateness and the practice of substituting assets with promissory notes.