reporting grats, gruts, ilits and idgts on form 709: gst

WHO TO CONTACT DURING THE LIVE EVENT

For Additional Registrations:

-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)

For Assistance During the Live Program:

-On the web, use the chat box at the bottom left of the screen

If you get disconnected during the program, you can simply log in using your original instructions and PIN.

IMPORTANT INFORMATION FOR THE LIVE PROGRAM

This program is approved for 2 CPE credit hours. To earn credit you must:

• Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover.

• Listen on-line via your computer speakers.

• Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees.

• To earn full credit, you must remain connected for the entire program.

Reporting GRATS, GRUTS, ILITS and IDGTs on Form 709:

GST Exemption Allocation Calculations and Strategies

TUESDAY, AUGUST 8, 2017, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

Tips for Optimal Quality

Sound Quality

When listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, please e-mail [email protected]

immediately so we can address the problem.

FOR LIVE PROGRAM ONLY

mailto:[email protected]

Aug. 8, 2017

Reporting GRATS, GRUTS, ILITS and IDGTs on Form 709

Keith Schiller, Esq.

Schiller Law Group, Alamo, Calif.

[email protected]

mailto:[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

Copyright Keith Schiller © 2014, 2015, 2016, and 2017. All Rights Reserved. Visit www.EstatePlanningAtTheMovies.com

Reporting GRATS, GRUTS, ILITS

and IDGTs on Form 709:

GST Exemption Allocation

Calculations and Strategies Presentation by Keith Schiller

For Strafford

August 8, 2017

Schiller Law Group 3201 Danville Blvd.,

Suite 285 Alamo, CA 94507

Ph: 925-820-8500


Art of the Estate Tax Return

Art of the Estate Tax Return –– Estate Planning At The

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6



Notices and Disclaimers © Keith Schiller. December 2014 and updated July, 2017. All rights reserved. No portion of these materials may be reproduced or copied without the prior written consent of the Schiller Law Group, a Professional Law Corporation, Keith Schiller, and Innovative Estate Planning Productions, Inc. No reproduction, retransmission, copying, or other use of the pictures, descriptions, or content of these materials may be made, copied, reproduced, or retransmitted, in whole or in part, without the prior written consent of Innovative Estate Planning Productions, Inc., Keith Schiller, and the Schiller Law Group, a Professional Law Corporation. The foregoing does not limit the rights of holders of rights in theatrical works with respect to their rights in the works independent of these materials. These materials are subject to the terms, limitations and notices of the book and/or course materials to which they are a part.

No one associated with this work, including but not limited to the author, publisher, consultant, reviewer, contributor and/or any law firm associated with the related book and/or materials and/or the author or publisher, is advising any reader, attendee, third party, or any user of the legal rights of any senior holder or others.

None of the persons quoted or referenced in the book and/or materials related to this program and/or presentation are rendering legal or tax opinions. Anyone considering the comments, references, citations, points of view, beliefs, judgments and/or other statements contained in this presentation or textbook should consult with independent legal and/or tax advisors.

TAX ADVICE DISCLAIMER:

No federal, state, or local tax advice is contained in this communication (including attachments, articles or materials). Nothing herein or attached constitutes tax advice nor was intended or written to be used, and it cannot be used, by the reader, or anyone, for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Keith Schiller is not licensed to practice law in any state other than California. No attorney-client relationship is established as a result of any book, any materials, these materials, or any of its references or contents, in whole or part, or any response thereto. No legal advice is being given.

7


To Get the Most Out of this Session:

Print the outline or have page references easy for you to shift to when

looking at the slides

Print out Appendix A including the factual assumptions and the sample Gift

Tax Return (Form 709) that illustrates compliance with these assumptions.

Ask questions during the session.

Ask questions during the session. (No retyping this was not an oversight.)

8


Topic Highlights

• Adequate Disclosure

• Identifying Direct Skip Transfers to Skip Persons Subject to GST Reporting in

Trust Documents

• GRAT and Crummey Trust GST Exemption Allocation Reporting

• Estate Tax Inclusion Period (ETIP) Rules and Exemption Allocations

• IDGT Seed Gifts and Basic Sales and Reporting

The Approach

Discussion of Significant Rules

Major focus will be the review of each of the foregoing through an illustrated

gift tax return.

9


Background Considerations

• Few gift tax returns are audited (p. 2)

• Definition of a gift (pp. 2-3. Reference only not a discussion topic.)

Adequate Disclosure Primary Topics:

• Pre-8/6/97 rules versus current rules

• Strategic significance

• “Adequate” is a misleading term

• Adequate disclosure of non-gift final transactions (sales)

• Filing gift tax returns for annual exclusion gifts

• Crummey gifts

• Present interest treatment issue with gifts of entity interests

• Gift tax rules and GST rules are inconsistent with gifts made in trust

Adequate Disclosure

Pages 4-9 10


Adequate Disclosure: Taking Positions Contrary to the Regulations

• Preference given to enforcing regulations… post-Mayo

• Penalties for negligence or disregard

• Exception for adequate disclosure (IRC § 6662(b)(1) and Forms 8275 or 8275R)

• Unique application for adequate disclosure on gifts (and expanded to public

rulings)

Pages 4-14 11


Planning and Gift Tax Compliance with GRATs (O: §5)

• IRC §2702 to avoid a zero value application to the gifted interest. (Qualified interest needed

when applicable family members receive remainder.)

• Adds a present-value discount to all other available discounts

• See chart pp. 21-23 for a comparison with an IDGTs

• (i) Blessed by statute and regulations; (ii) Excellent software available for modeling; (iii)

Low audit risk [least of all advanced techniques]; (iv) shifts wealth in excess of the value of

the gift plus the IRS “hurdle” rate [IRC §2702 rate]

• (i) Cannot allocate GST exemption during the retained period (due to the ETIP rules); (ii)

Repayment to the grantor is in the form of an annuity, which returns principal and the

hurdle rate over retained period; and (iii) the IRC §2702 is greater than the mid-term AFR…

thus, the grantor is returned a higher “hurdle rate” than with an IDGT.

• Numerous technical requirements and cannot borrow to make annuity payments.

Pages 14-18

12


Planning and Gift Tax Compliance with GRATs

• Be certain that each GRAT payment is timely made.

• If grantor dies during the retained term, gross estate includes value based on annuity

payment divided by the 7520 rate at time of death. If 7520 rate is higher than at time of the

gift, value effectively gifted on the difference.

• The following gift in the illustrated Form 709 (Appendix A and related facts) is a GRAT gift.

The illustrated return will be discussed later in the class. The following are advanced

headlines:

* December 1, 2015 gift (Later see A-3-6 to the sample Form 709)

* No allocation of GST exemption made as of yet (ETIP)

* Whether to “zero out”

Pages 14-18 13


Planning and Gift Tax Compliance with QPRTs (O: §6)

• IRC §2702: Exception to zero value added by time value discount when gift made to

applicable family member

• As with a GRAT, it is a gift of a future interest.

• As with a GRAT, the remainder interest can be an IDGT.

• Time-value discount added to all other discounts.

• (i) Blessed by statute and regulations; (ii) Excellent software available for modeling; (iii)

Low audit risk [least of all advanced techniques]; (iv) no required annuity payments unless

residence sells and proceeds remain.

• Numerous technical requirements and limitations (primary or secondary residence, limited

allowances for cash reserves, problems with debt)

• Cannot allocate GST exemption during the retained period (due to the ETIP rules)

• Later see QPRT illustrated in Appendix A, gift of December 23, 2015 (A-1-3)

Pages 18-20 14


IDGT Planning (O: §7)

• Comparison Chart to GRAT, pp. 21-23

• Most tax efficient of all sophisticated gifting strategies

• Seed gift: No rule of law, 10% is common practice used in a PLR.

• Guaranty of payment by beneficiary: Consider a guarantor fee.

• Key public rulings: Rev. Ruls. 85-13 (non-taxable sale), 2004-64 (tax liability treatment); and

2008-22 (no-fiduciary power to substitute assets)

• Properly structured, payment of income taxes by grantor not an additional gift

• Risk of valuation change in audit.

– Formula Clause Gifting: Pour-over to bona fide third party non-taxable recipient (e.g., Petter,

Christiansen, and Hendrix [highly precise and intricate compliance]) and Wandry (no third party

pour-over- a TCM case) reject Procter. See, Art of the Estate Tax Return, chpt. 6, §6.7.5.

– IRS looking for a piggy case

Pages 20-24 16


IDGT Planning (O: §7) Continued and Compliance

• Major IDGT benefit is the ability to buy-back asset in non-recognition event

– Donor gifts low basis asset to IDGT. Problem: If IDGT holds that asset when donor

dies, there is no basis adjustment. Solution: Before death, the donor re-acquires the

asset from the IDGT in exchange for high basis asset. Result: Basis adjustment for asset

on donor’s death and IDGT has carryover basis on high-basis asset.

• Audit: Examination referring Wandry cases to IRS Counsel for consideration with very few

are challenged. Generally, some other issue is involved in the case

Pages 20-24 17


IDGT Compliance (O: §7)

• Extensive document disclosures for adequate disclosure purposes.

• Self-cancelling features can leverage tax savings (if grantor does not live past life

expectancy), but adds problems if premium not correct or life expectancy questionable.

• Later see gift of 3/1/2015, Schedule A, Part 2, item 1 reporting a defined-value gift using

special language to describe the gift

• Common experience is to have an initial value determined when planning and then update

as of the valuation date of the gift. This uses actual gift value. It may lead to adjustments in

the interest transferred.

• The seed gift is a reportable gift (if the trust is drafted to achieve that result).

• The sale component is for disclosure to start the statute.

• If a Crummey trust is used, the grantor-trust rules of the original grantor trump. IRS §678(b)

Pages 20-24 18


GST (O: §8)- Author’s Alerts

1. Get age differential between decedent/donor and donee for non-family transfers

2. Avoid substantial modifications (or additions) to chronologically exempt trusts. O:

§8.2-8.4

3. Annual exclusion gifts in trust to a skip person (e.g., grandchild or other skips) are taxable

transfers under GST law unless (a) vested interest and (b) skip person is the sole beneficiary.

4. Make affirmative elections on Form 709 regarding whether a trust shall be classified as a

GST trust or not and whether you want GST exemption allocated to that trust. This avoids

misunderstanding the result and whether GST exemption is being allocated.

5. Identify whether trust establishes separate share. (See O: §8.11)

6. Be certain to correctly identify whether a gift has any potential GST impact when

completing Schedule A to Form 709. Incorrect reporting on Schedule A will lead to errors on

Schedule D when GST exemption allocations and possible GST tax liability are considered.

Pages 24-25 19


GST (O: §8)- Author’s Alerts Continued

7. On gifts to non-skip persons in which there may later be a GST event (i.e., a taxable

termination or taxable distribution)… the so-called indirect skips… determine whether

current or late allocation of GST exemption is desired.

Rule: Date of gift values apply in the denominator of the applicable fraction when deemed

allocation applies or GST exemption is timely allocated. With a late allocation of GST

exemption, the value for purposes of the denominator is the value as of the date of the late

filing or the first day of the month in which the late filing occurs:

If values go down between gifting and Form 709 filing with an indirect skip, less

GST exemption will be needed in the numerator of the applicable fraction to achieve a zero

inclusion ratio (i.e., no GST tax).

ILIT planning and communication with client

• A zero inclusion ratio means no GST tax because zero times the GST tax rate = 0%.

Pages 24-25 20



8. Crummey trusts include significant traps, especially under GST law. (See also §8.18, p. 44)

- General: Notice to beneficiaries, proof and report to avoid IRS

accumulating the issue

Estate of Trotter (pre-arranged deal)

Holland, Cristofani, Kohlsaat, and Turner

GST traps with Crummey gifts

– Donee becomes transferor if lapse of withdrawal right

exceeds the $5,000/5% limit.

Ex: $14K gift to child in Crummey trust, remainder

to G/C. Lapse at annual exclusion amount. Parent

is transferor of $14K and child is transferor of 9K

Solutions: Hanging power

Cascading power

Large seed gift

Issue: Can a late GST Exemption Allocation Help?

Pages 24-25 21



• Crummey Issues Continue:

Example of a large gift, such as to an ILIT to avoid Crummey Issues.

Assume $90K annual premium on life insurance.

Gift an interest in an LLC owning, for example, rental real property that generates a 6%

annual return on $1.5M of pre-discounted value (i.e., $90,000, or a 9% return assuming a

1/3rd discount on the gifted minority interest).

Assume that the donors (H and W) have three children, each of whom receives a total

33.33% interest in the gifts (i.e., a $333,333 total gift to each child, or $166,667 from each

parent).

Result: Each $333,333 gifts is $28K of annual exclusions and $305,333 taxable (using gift tax

exemption). The income from the LLC covers the premium payments. Also, 5% of each gift

equals $16,666. Thus, if later annual exclusion gifts are made to the trust, there is no lapse

in excess of the 5/5 limit.

Pages 24-25 22


GST Events

• Direct skip

• Taxable distribution

• Taxable termination

Pages 27-32 23


Skip Persons

Skip Trusts Individuals

Non-Skip Persons

Anyone who is not a skip person

vs.

Classification of People and Trusts

24


Skip Persons

• Two or more generations below the transferor

• Family and non-family rule (based on age)

• Move-up rule (predeceased ancestor)

• 90-day survivorship • Multiple generation rule

26


Direct Skip

• Transfer to skip person or skip trust subject to FET or FGT

• Must be able to recognize a skip person • Must be able to recognize a skip trust • Form 709: Allocation of GST exemption

or pay GST tax • Form 706 (Schedule R): Allocate GST

exemption or pay GST tax

27


Skip Trusts

• Trust with only one or more skip beneficiaries • Prior to 2001, automatic GST exemption allocated to

skip person and skip trust only • After 2001, automatic allocation of GST exemption

applies to GST trusts • Annual exclusion gift treatment (the skip trust must be

vested for that respective skip beneficiary). IRC Sec. 2642(c).

28


Direct Skip Transfer in Trust

• A GST taxable event can arise when the interest on a skip person concludes with a direct skip trust

Example: Grandparent (GP) gifts to grandchild (GC) in trust. When interest of GC ends, the trust passes to GGC Result: A taxable termination arises when GC’s interest concludes (assuming no FET or GFT results)

29


Taxable Distribution

• Payment of income or principal to a skip person

• Trust must have both skip and non-skip beneficiaries

• Beneficiary pays GST tax or there is added transfer

• Qualified medical and tuition exception

30


Taxable Termination

• Trust ceases to have non-skip beneficiaries

• Trust benefits pass to skip person(s)

• Not subject to FET

• “Rockefeller purpose”

• Also, even small estates can fall into a tax trap

31


GST Trust

Enacted in 2001 because preparers failed to consider allocation of GST exemption to gifts exempt under FGT law but not GST law

Pages 29-31 32


GST Trust

• Expands deemed allocation of GST exemption in an expanded setting to avoid inadvertent failure to allocate GST exemption with indirect skips.

• It applies to all trusts in which there may later be a taxable termination or taxable distribution unless within an exception.

* Major exceptions (not full list): Over 25% principal paid before age 46 GPA over 25% of trust

• However, deemed allocation of GST exemption is not always desirable with GST Trusts • Examples include:

• ILITs (since trust value often declines after gifts received) • Assets that decline in value

• Questions may exist as to whether a trust is or is not a GST Trust • Practitioners on Form 709 can state desired intent and whether GST exemption

allocation is made or elected out. (Notice of allocation)

33


Direct Skip Transfer in Trust

• Taxable termination arises in prior example … transferor is assigned to one generation above the GC (i.e., a child)

• Property to GGC is a skip as to a child • Move-down rule

34


Valuation Rules and GST Exemption Allocations

• GST Exemption is the same as the basic exclusion amount ($5,490,000), those before the 2004 there were differences

• Annual exclusion gifts(also qualified medical and tuition) • Outright same as gift tax law • If in trust, the gift must be a vested gift to a skip trust with one skip

beneficiary of that share to be non-taxable

Pages 35-36 35


Valuation Rules and GST Exemption Allocations

• Valuation results determine the denominator of the applicable fraction • Inclusion ratio: 1 minus the applicable fraction. • GST Tax: GST tax rate (40%) x the inclusion ratio

• Lifetime gifts: Date of gift value unless GST exemption is allocated late

• If late: Date of late return or first day of month of late return (Death exception) • ILITs: Major planning consideration • Are deemed allocations good or bad… I will relate the story

of the “Keiths” • Communication with client vital • Pritchard case (p. 40) Pages 35-36

36


Deemed Allocation Rules

• Pre-1/1/2001: • Deemed allocation ONLY to direct skip transfers

• Post-12/31/2000 • Direct skip transfers AND • GST Trusts

Pages 37-40 37


Purpose of Gift Tax Returns under GST Law

• Pay GST tax on direct skip transfers that are not GST exempt • Allocate GST exemption to current taxable direct skip transfers to avoid

payment of GST tax • Allocate GST exemption (as desired) to indirect skips • Opt out of the automatic allocation of GST exemption with indirect skips

(either for gifts in the current year and/or for gifts to a trust in a future year) • Make late GST exemption allocations if the desired inclusion ratio was not

previously achieved and GST exemption is available. • Make retroactive allocations of GST exemption in the event order of death

of non-skip beneficiary is not natural • Make protective GST exemption allocations • Seek relief for late GST exemption allocations under Rev. Proc. 2004-46 on

pre-1/1/2001 gifts (p. 43)

Pages 48-50

38


Commence Illustrated Form 709 – See Appendix 1 (p. 51) and Sample Return (starts on p. 55) that follows at end of outline

– This sample gift tax return will illustrate the following:

• How to spot whether a skip trust is vested for non-taxable transfer purposes

• How to report sales with adequate disclosure of non-gift transactions

• 529 Gifts

• GRAT gift

• QPRT gift

• IDGT gifts and sales

• Correct completion of Schedule A and its integration with Schedule D

• Every type of GST exemption allocation: (i) Current to direct skip; (ii) Current to indirect skips;

(iii) Crummey trust problems; (iv) Elections out of GST exemption allocation; (v) future elections

out of GST exemption allocations; (vi) Late allocation of GST exemption allocation; (vii) Late

allocation of GST exemption allocation on pre-2001 gifts under special relief rule; (viii) Zero

inclusion ratio protective language.

• Correct completion of Schedule

Pages Sample 709

39


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