As discussed in a prior blog, the generation skipping transfer tax (“GSTT”) is a draconian tax of 40% on transfers to certain unrelated individuals younger than 37.5 years of the transferor, grandchildren and more remote descendants. Fortunately, however, Congress provides an exemption (the “GSTT Exemption”) , currently $11.180 million, which helps avoid such tax. The allocation of the GSTT Exemption, especially to trusts that can result in GSTT, is a critical element of estate planning. A recent private letter ruling (“PLR”) addresses the issue of a late GSTT Exemption allocation to a GSTT trust which was created with a defective split gift.
In PLR 201811002, released on March 16, 2018, Husband created 4 irrevocable trusts for his children. Each trust provides income to the child for their lifetime. Upon a child’s death, the trust would be distributed to the child’s children (Husband’s grandchildren) when they reach age 35.
The CPA filed the gift tax return (Form 709) agreeing that such a gift was “split” between Husband and Wife. Unfortunately, instead of 50/50 which is required for gift splitting, the return indicated that Husband gave 75% of the gift and Wife gave 25% of the gift. No GSTT Exemption was allocated to the transfers to the trust even though the trust provided that grandchildren would be beneficiaries of the trust.
At some later time, CPA advised Husband to allocate his remaining GSTT Exemption to the trusts on a properly filed Form 709. Husband allocated his GSTT Exemption to 100% of the value of the trust as of the time of the allocation of the GSTT Exemption (a “late allocation”). Wife made NO late allocation of her GSTT Exemption.
Husband asked the Internal Revenue Service (“IRS”) to rule that the statute of limitations to audit the original Form 709 reporting the gift at 75% and 25% had expired. If the statute of limitations had expired, then the value of Husband’s gift would be fixed at 75% (not the 50% required in gift splitting). The IRS favorably ruled that the period for assessments for the original gift tax return had expired and the value of husband’s gift is 75% of the value of the gift.
Unfortunately, however for GSTT Exemption purposes, Husband is treated as the transferor of only 50% of the total value of the trust, regardless of the interest he is deemed to make on the original gift tax return (75%). Thus, Husband’s late allocation is only effective as to 50% of the total value of the trust. Thus, the trust is only 50% exempt from GSTT. Thus, as the trust is not fully exempt from GSTT, a portion of every transfer to a “skip” person would be subject to GSTT.
ADVICE: The GSTT and the gift tax are not easy issues. You MUST have a qualified CPA and attorney help you with the preparation of gift tax returns that report gifts and allocate the GSTT Exemption. Anytime the terms of a trust indicate that grandchildren or more remote descendants are beneficiaries, then consider allocation of the GSTT Exemption.
WORD OF THE WEEK: Gift splitting is a provision in the Internal Revenue Code that permits a married couple to consider a gift split between a husband and wife when only one of them actually make the gift. For example, Bob and Sally are married. Bob makes a gift of $100,000 to his daughter. When Bob files his gift tax return, he must use part of his gift tax exemption (an amount in excess of the $15,ooo allowable gift per person per year) or $85,000. If Sally consents to split the gift with Bob, then Sally is considered making 1/2 of the gift and Bob only has to use $42,500 of his gift tax exemption. Sally would use $42,500 of her exemption. The only requirement is that Bob and Linda are US citizens, are married at the time of the gift and, if they dissolve their marriage prior to the end of the year the gift is made, have not remarried. Sally must sign Bob’s gift tax return consenting to the split gift.
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