Improper GST Exemption Allocation? PLR Saves the Day!
As previously discussed in a prior blog, the use of the generation skipping transfer tax (“GSTT”) exemption of $11.180 million (the “Exemption”) is very important in planning, as the Exemption saves 40% in GST taxes if properly allocated. What if the Exemption is allocated incorrectly and not required? Is the Exemption “wasted”?
In private letter ruling (“PLR”) 201836007, an individual (“Taxpayer”) established 3 irrevocable trusts, each for the benefit of each of the Taxpayer’s children, the primary beneficiary. The trust provides that the trustee can make discretionary distribution of income for the health, education and support of the primary beneficiary. Upon the death of the Taxpayer and his spouse, the trustee may make discretionary distributions of principal for the health, education and support of a primary beneficiary. A primary beneficiary receives distributions of trust principal at certain ages. Further, the trust grants each primary beneficiary a testamentary power to appoint the trust assets to the primary beneficiary’s estate, the creditors of the primary beneficiary’s estate or to any person or corporation. If not appointed, then assets are distributed outright to the primary beneficiary’s lineal descendants.
Taxpayer and spouse allocated their Exemptions to each of these trusts on a properly filed Form 709 and the Taxpayer and spouse consented to the transfers as being made 1/2 by each. As discussed below, the allocation of the Exemptions were unnecessary. Thus, the Taxpayer requested a ruling that the allocations of the Exemption were void because there was NO GSTT potential with respect to these transfers.
The GSTT is applicable to certain distributions to individuals 2 generations below the transferor (in this case, the Taxpayer) (a “skip person”). Thus, a transfer to the Taxpayer’s grandchild would be a transfer to a “skip” person subject to the GSTT. Taxpayers trust provides that, if a child dies prior to receiving their funds, then the funds would be distributed to such child’s lineal descendants (the Taxpayer’s grandchildren). Thus, it appears that the trust WOULD be subject to GSTT and the Exemption should have been allocated.
However, it is important to carefully read the trust. Prior to the distribution to the children of the primary beneficiary (the Taxpayer’s grandchildren), the primary beneficiary (the child) has a testamentary power to appoint the funds to their estate, creditors of their estate, any person or corporation. This power is called a general power of appointment (“GPOA”).
When an individual holds a GPOA, this causes the trust assets to be included and taxed in such individual’s estate. Thus, by virtue of holding this GPOA, the transferor changes from the Taxpayer to the child. Thus, as the Taxpayer is no longer considered a transferor, the Taxpayer’s Exemption is not needed for allocation.
In the PLR, the Internal Revenue Services cites a treasury regulation which provides that an allocation is void if the allocation is made with respect to a trust that has NO GSTT potential with respect to the transferor. Because the testamentary power of appointment changes the transferor to the child, there is NO GSTT potential as to the original transferor, the Taxpayer.
The IRS determined that the allocation was void. Thus, the Exemptions were available to the Taxpayer and his spouse for future gifts.
ADVICE: GSTT is not for the “weak of heart”. It is extremely difficult and takes an expert to wade through the intricacies of the Internal Revenue Code. Whenever you are filing a gift tax return which has GSTT implications, you must carefully review the terms of the trust and make sure that an allocation of the Exemption is necessary. Fortunately, a Treasury regulation is on point IF the trust can never be subject to GSTT. The harder issue is when the trust MAY be subject to GSTT tax. In these situations, you have to carefully consider the Exemption allocation.
WORD OF THE WEEK: Disclaimer is a renunciation of one’s legal right or claim. For tax purposes, a disclaimer can be made to avoid a gift. Sam’s will states that he gives Sally 1 million dollars, if living, and, If not, then to Sally’s daughter, Lucy. If Sally actually receives 1 million dollars and then decides to give the money to Lucy, Sally must file a gift tax return for the gift 1 million dollars (less the $15,000 annual exclusion) and either pay gifts taxes or use part of her gift tax exemption. Alternatively, if she disclaims the gift within 9 months of Sam’s date of death and has received no benefits from such distribution, as provided under the Internal Revenue Code, then the money would be distributed directly to Lucy and no gift tax return is required.
GENEROSITY IS A KEY TO HAPPINESS…REACH OUT AND HELP SOMEONE TODAY! 😎