reporting grats, gruts, ilits and idgts on form 709: gst...
TRANSCRIPT
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 registeradditional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Straffordaccepts 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 downonly the final verification code on the attestation form, which will be emailed to registered attendees.
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Reporting GRATS, GRUTS, ILITS and IDGTs on Form 709:GST Exemption Allocation Calculations and StrategiesWEDNESDAY, JULY 13, 2016, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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 registeradditional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Straffordaccepts 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 downonly 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.
Tips for Optimal Quality
Sound QualityWhen listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internetconnection.
If the sound quality is not satisfactory, please e-mail [email protected] so we can address the problem.
FOR LIVE PROGRAM ONLY
Sound QualityWhen listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internetconnection.
If the sound quality is not satisfactory, please e-mail [email protected] so we can address the problem.
July 13, 2016
Reporting GRATS, GRUTS, ILITSand IDGTs on Form 709
Tracy M. Child, J.D., LLM., Partner
Sherman Wells Sylvester & Stamelman
Joy Matak, J.D., LLM., Director
CohnReznick
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYTHE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANYOTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THATMAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING 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 transactiondescribed 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 aresubject to change. Applicability of the information to specific situations should bedetermined through consultation with your tax adviser.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYTHE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANYOTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THATMAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING 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 transactiondescribed 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 aresubject to change. Applicability of the information to specific situations should bedetermined through consultation with your tax adviser.
Gift Tax Returns
What is gift tax return?• If a Donor makes a gift worth more than the annual tax exclusion amount
($14,000 in 2015 and 2016), the Donor must file a gift tax return (Form 709).
Who is responsible for filing gift tax return?• All individuals who make a gift to another individual or entity that exceeds the
annual exclusion amount must file a gift tax return. The Donor is responsiblefor paying the gift tax, except in certain circumstances in which IRS allows thegift recipient to pay the gift tax.
What is the benefit of filing gift tax return?• By filling the gift tax return, the government is formally advised of the transfer
and less likely to challenge that transaction in the future.
What is gift tax return?• If a Donor makes a gift worth more than the annual tax exclusion amount
($14,000 in 2015 and 2016), the Donor must file a gift tax return (Form 709).
Who is responsible for filing gift tax return?• All individuals who make a gift to another individual or entity that exceeds the
annual exclusion amount must file a gift tax return. The Donor is responsiblefor paying the gift tax, except in certain circumstances in which IRS allows thegift recipient to pay the gift tax.
What is the benefit of filing gift tax return?• By filling the gift tax return, the government is formally advised of the transfer
and less likely to challenge that transaction in the future.
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Bea And Ben Generous
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WHO IS A Donee?
• Each individual, trust or charity listed onSchedule A equals one donee.
• However, if the beneficiaries of a trust have apresent interest in the gift (e.g., Crummeywithdrawal rights), then each beneficiary ofthe trust is a donee.
• Each individual, trust or charity listed onSchedule A equals one donee.
• However, if the beneficiaries of a trust have apresent interest in the gift (e.g., Crummeywithdrawal rights), then each beneficiary ofthe trust is a donee.
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Bea Generous Donees• Forgiveness of indebtedness owed by Marion Money = 1 donee• Gift to Juana B. Generous = 1 donee• Gift to Community Foundation Charitable Organization = 1 donee• Gift to Easy Living Qualified Personal Residence Trust = 1 donee• Gift to Bea Generous 2013 GRAT = 1 donee• Gift to Ivan Money 2013 Trust = 1 donee• 529 Plan Gift to Xavier Money = 1 donee• Non-gift disclosure of sale to Grandchildren’s Generous Trust = 1 donee• Gift to Bea Generous GST Trust for Robin Money = 1 donee
– Robin Money has a right of withdrawal• Gift to Collette A. Day = 1 donee• Gift to Generous Giving Family Trust = 2 donees
– The following three beneficiaries each have a right of withdrawal:• Ben Generous• Marion Money (already counted above)• Owen Money
• Gift to Generous Dynasty Trust = 1 donee• Gift to Ben Generous Spousal Access Trust = 1 donee• GST Allocation to Ben Generous 2011 GRAT upon termination = 1 donee
TOTAL: 15 donees
• Forgiveness of indebtedness owed by Marion Money = 1 donee• Gift to Juana B. Generous = 1 donee• Gift to Community Foundation Charitable Organization = 1 donee• Gift to Easy Living Qualified Personal Residence Trust = 1 donee• Gift to Bea Generous 2013 GRAT = 1 donee• Gift to Ivan Money 2013 Trust = 1 donee• 529 Plan Gift to Xavier Money = 1 donee• Non-gift disclosure of sale to Grandchildren’s Generous Trust = 1 donee• Gift to Bea Generous GST Trust for Robin Money = 1 donee
– Robin Money has a right of withdrawal• Gift to Collette A. Day = 1 donee• Gift to Generous Giving Family Trust = 2 donees
– The following three beneficiaries each have a right of withdrawal:• Ben Generous• Marion Money (already counted above)• Owen Money
• Gift to Generous Dynasty Trust = 1 donee• Gift to Ben Generous Spousal Access Trust = 1 donee• GST Allocation to Ben Generous 2011 GRAT upon termination = 1 donee
TOTAL: 15 donees9
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BasicsA spouse of a donor may elect to be treated as the
donor of one-half the value of the of the giftsmade by the donor from the donor’s separatefunds.
The spouse must sign the donor’s gift tax returnconsenting to the election.
If spouses choose to split gifts, they must split alleligible gifts.
Spouses cannot split gifts made to a trust in whichthe other spouse has a beneficial interest, unlessthe other spouse’s interest is ascertainable.
A spouse of a donor may elect to be treated as thedonor of one-half the value of the of the giftsmade by the donor from the donor’s separatefunds.
The spouse must sign the donor’s gift tax returnconsenting to the election.
If spouses choose to split gifts, they must split alleligible gifts.
Spouses cannot split gifts made to a trust in whichthe other spouse has a beneficial interest, unlessthe other spouse’s interest is ascertainable.
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Example One
Bea Generous creates a trust for the benefit of herhusband, Ben Generous, and her descendants. The trusteehas complete discretion to make distributions to thebeneficiaries. The portion of the gift allocable to Ben is notascertainable, so the election to split gifts to this trustwould not be effective.
Bea Generous creates a trust for the benefit of herhusband, Ben Generous, and her descendants. The trusteehas complete discretion to make distributions to thebeneficiaries. The portion of the gift allocable to Ben is notascertainable, so the election to split gifts to this trustwould not be effective.
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Example Two
Bea Generous gifts $78,000 to a Crummey trust.Ben and two of Bea’s children each have the rightto withdraw $26,000. Because Ben’s interest in thegift is ascertainable (i.e., $26,000), they may splitall but $26,000 of the gift.
Bea Generous gifts $78,000 to a Crummey trust.Ben and two of Bea’s children each have the rightto withdraw $26,000. Because Ben’s interest in thegift is ascertainable (i.e., $26,000), they may splitall but $26,000 of the gift.
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amount of gi split ≠ gst exemption allocation
If spouses elect to split gifts and a portion ofthe gift cannot be split, as in the exampleabove, the gift can still be fully split for GSTexemption allocation purposes.
In the example above, Ben is only reportinggifts of $28,000 to the trust beneficiaries, buthe may allocate up to $42,000 of his GSTexemption to the trust.
If spouses elect to split gifts and a portion ofthe gift cannot be split, as in the exampleabove, the gift can still be fully split for GSTexemption allocation purposes.
In the example above, Ben is only reportinggifts of $28,000 to the trust beneficiaries, buthe may allocate up to $42,000 of his GSTexemption to the trust.
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Deceased Spousal Unused Exclusion orPortability
• If a first-to-die spouse has not fully used the lifetime exclusion, the unused portioncan be transferred or “ported” to the surviving spouse. Thereafter, for both giftand estate tax purposes, the surviving spouse’s exclusion is the sum of his/her ownexclusion (as such amount is inflation adjusted), plus the first-to-die’s portedDeceased Spousal Unused Exclusion (DSUE) amount.
– Example: Ben and Bea Generous (U.S. citizens) have only been married to eachother. Bea owns assets worth $5.43 million and Ben owns assets worth $5.43million. Ben Generous dies in 2015 leaving his entire estate to Bea, using noneof his lifetime exclusion. Ben’s DSUE amount is $5.43 million (his exclusion of$5.43 million less the $0 used, because all of his assets were transferred toBea, his spouse). Bea’s exclusion in 2015, for gift and/or estate tax purposes, is$10.86 million (her own $5.43 million plus the $5.43 million ported DSUEamount). Bea could make gifts of $10.86 million in 2015 and fully shield thosegifts from transfer. If Bea did not make gifts but died in 2015 with a $10.86million estate, she could fully shield her estate from estate taxes.
• The general rule is that surviving spouse can use the DSUE amount of his/her lastdeceased spouse. This will be an issue only if the survivor marries again.
• If a first-to-die spouse has not fully used the lifetime exclusion, the unused portioncan be transferred or “ported” to the surviving spouse. Thereafter, for both giftand estate tax purposes, the surviving spouse’s exclusion is the sum of his/her ownexclusion (as such amount is inflation adjusted), plus the first-to-die’s portedDeceased Spousal Unused Exclusion (DSUE) amount.
– Example: Ben and Bea Generous (U.S. citizens) have only been married to eachother. Bea owns assets worth $5.43 million and Ben owns assets worth $5.43million. Ben Generous dies in 2015 leaving his entire estate to Bea, using noneof his lifetime exclusion. Ben’s DSUE amount is $5.43 million (his exclusion of$5.43 million less the $0 used, because all of his assets were transferred toBea, his spouse). Bea’s exclusion in 2015, for gift and/or estate tax purposes, is$10.86 million (her own $5.43 million plus the $5.43 million ported DSUEamount). Bea could make gifts of $10.86 million in 2015 and fully shield thosegifts from transfer. If Bea did not make gifts but died in 2015 with a $10.86million estate, she could fully shield her estate from estate taxes.
• The general rule is that surviving spouse can use the DSUE amount of his/her lastdeceased spouse. This will be an issue only if the survivor marries again.
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Schedule C – Calculation ofDSUE Amount
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Applicable Credit Amount
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Notes about DSUE
• Unused Generation Skipping Transfer Taxexemption cannot be used by a surviving spouse
• The DSUE may be affected on audit of a deceasedspouse’s prior gift tax returns or estate tax return,particularly in the case where closely heldbusiness interests were transferred. A survivingspouse may want to consider incorporating DSUEusage with formula gifting.
• Unused Generation Skipping Transfer Taxexemption cannot be used by a surviving spouse
• The DSUE may be affected on audit of a deceasedspouse’s prior gift tax returns or estate tax return,particularly in the case where closely heldbusiness interests were transferred. A survivingspouse may want to consider incorporating DSUEusage with formula gifting.
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The IDGT: A Highly Effective“Defective” Trust
Defective for Income TaxPurposes
• Income is taxable tothe grantor or thebeneficiaries
• Sale to trust is a non-taxable event
Effective for Estate TaxPurposes
• Trust Corpus is excludedfrom Grantor’s estatefor estate tax purposes
• Taxes paid on incomeearned by the trustfurther reduces estate
Defective for Income TaxPurposes
• Income is taxable tothe grantor or thebeneficiaries
• Sale to trust is a non-taxable event
Effective for Estate TaxPurposes
• Trust Corpus is excludedfrom Grantor’s estatefor estate tax purposes
• Taxes paid on incomeearned by the trustfurther reduces estate
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IDGT: Best Ways to Break the Rules
• §674(a)- power to control beneficial enjoyment• §675(1) – power to deal with trust assets for less
than full & adequate consideration• §675(2) – specific power of grantor to borrow
trust assets without adequate security oradequate interest
• §675(3) – actual borrowing of trust assets by theGrantor
• §675(4)(C) - power to substitute assets(exercisable in Non-Fiduciary capacity)
• §674(a)- power to control beneficial enjoyment• §675(1) – power to deal with trust assets for less
than full & adequate consideration• §675(2) – specific power of grantor to borrow
trust assets without adequate security oradequate interest
• §675(3) – actual borrowing of trust assets by theGrantor
• §675(4)(C) - power to substitute assets(exercisable in Non-Fiduciary capacity)
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Sale to IDGT1. Grantor makes “seed” gift of at least 10% (as a rule of
thumb) of the purchase price to be paid by the IDGT
2. Grantor sells asset with expected future appreciation toIDGT
3. IDGT pays for asset with a Promissory Note, using thecurrent applicable federal rate
4. No income tax on sale of asset to IDGT
5. Adequately disclose non-sale transaction on timely filedgift tax return
1. Grantor makes “seed” gift of at least 10% (as a rule ofthumb) of the purchase price to be paid by the IDGT
2. Grantor sells asset with expected future appreciation toIDGT
3. IDGT pays for asset with a Promissory Note, using thecurrent applicable federal rate
4. No income tax on sale of asset to IDGT
5. Adequately disclose non-sale transaction on timely filedgift tax return
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Statute of Limitations
• Generally, the IRS must assess tax within threeyears after a return is filed. If the value ofomitted gifts exceeds 25% of the total amount ofgifts reported on the return, the statute oflimitations is six years.
• There is no statute of limitations barringassessment if no return is filed or if the return isfalse or fraudulent.
• The statute of limitations does not apply to giftsthat are not adequately disclosed.
• Generally, the IRS must assess tax within threeyears after a return is filed. If the value ofomitted gifts exceeds 25% of the total amount ofgifts reported on the return, the statute oflimitations is six years.
• There is no statute of limitations barringassessment if no return is filed or if the return isfalse or fraudulent.
• The statute of limitations does not apply to giftsthat are not adequately disclosed.
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Adequate DisclosureSafe Harbor For Gifts
A gift will generally be adequately disclosed if the return is full and completeand the return or an attached statement includes the following: A description of the transferred property and any consideration received
by the donor; The identity of, and relationship between the donor and each donee; If the property is transferred to a trust, the trust’s employer identification
number and a brief description of the terms of the trust or a copy of thetrust; and
Either a qualified appraisal or detailed description of the method used todetermine the fair market value of the gift.
A statement describing any position taken that is contrary to any proposed,temporary or final Treasury regulations or revenue rulings published at thetime of the transfer.
A gift will generally be adequately disclosed if the return is full and completeand the return or an attached statement includes the following: A description of the transferred property and any consideration received
by the donor; The identity of, and relationship between the donor and each donee; If the property is transferred to a trust, the trust’s employer identification
number and a brief description of the terms of the trust or a copy of thetrust; and
Either a qualified appraisal or detailed description of the method used todetermine the fair market value of the gift.
A statement describing any position taken that is contrary to any proposed,temporary or final Treasury regulations or revenue rulings published at thetime of the transfer.
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Qualified AppraiserTreas. Reg. Sect. 1.704-13(c)(5)(iv)
Qualified Appraiser CANNOT be:• Transferor or Member of Transferor’s/Transferee’s
Family• Party to the transaction• Persons or business entities receiving or purchasing the
transferred property• Employee of a person or organization listed above• Related Party as defined in IRC Sect. 267(c)• Appraiser regularly used by excluded person who does
not perform majority of appraisals for others
Qualified Appraiser CANNOT be:• Transferor or Member of Transferor’s/Transferee’s
Family• Party to the transaction• Persons or business entities receiving or purchasing the
transferred property• Employee of a person or organization listed above• Related Party as defined in IRC Sect. 267(c)• Appraiser regularly used by excluded person who does
not perform majority of appraisals for others
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Disclosure ofNon-Gift Transactions
Non-gift transactions may be reported on a gift tax return tostart the statute of limitations in which the IRS must determine ifa taxable gift was in fact made.
In order for a non-gift transaction to be considered adequatelydisclosed, it must meet all of the disclosure requirements forgifts listed above, plus an explanation as to why the transfer isnot a transfer by gift under the Internal Revenue Code must beincluded.
Non-gift transactions may be reported on a gift tax return tostart the statute of limitations in which the IRS must determine ifa taxable gift was in fact made.
In order for a non-gift transaction to be considered adequatelydisclosed, it must meet all of the disclosure requirements forgifts listed above, plus an explanation as to why the transfer isnot a transfer by gift under the Internal Revenue Code must beincluded.
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Sample Statement of Disclosure
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Generation Skipping Tax & Skip Person
• What is the Generation Skipping Tax?
Generation-skipping transfer tax imposes a tax on both outright gifts andtransfers in trust to or for the benefit of skip person.
• Who is a Skip Person?• A skip person is a natural person assigned to a generation which is 2 or more
generations below the generation assignment of the transferor (donor), or• A trust, if all interests in such trust are held by skip person, or• No person holds an interest in the trust, and at no time after the transfer to
the trust, may a distribution be made to a non skip person.
• What is the Generation Skipping Tax?
Generation-skipping transfer tax imposes a tax on both outright gifts andtransfers in trust to or for the benefit of skip person.
• Who is a Skip Person?• A skip person is a natural person assigned to a generation which is 2 or more
generations below the generation assignment of the transferor (donor), or• A trust, if all interests in such trust are held by skip person, or• No person holds an interest in the trust, and at no time after the transfer to
the trust, may a distribution be made to a non skip person.
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Generation Assignment
Related Beneficiaries
Grantor's Parent
Grantor
Grantor'sChild
Grantor'sGrandchild
Grantor'sBrother/Sister
Grantor'sNephew/Niece
Grantor'sGrand Nephew/Niece
Grantor'sUncles/Aunts
Grantor'sCousin
Cousin'sChild
Cousin'sGrand Child
UnrelatedBeneficiaries
Related Beneficiaries
Grantor's Parent
Grantor
Grantor'sChild
Grantor'sGrandchild
Grantor'sBrother/Sister
Grantor'sNephew/Niece
Grantor'sGrand Nephew/Niece
Grantor'sUncles/Aunts
Grantor'sCousin
Cousin'sChild
Cousin'sGrand Child
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Direct skip vs. Indirect skip
• A direct skip is a property transfer made to a skip person that is subject to anestate of gift tax. An example of a direct skip would b a grandmother giftingproperty to a grandchild. The transferor, or his or her estate, is responsible forpaying the GST tax for direct skips.
• Indirect skips involve transfers that have intermediate steps before reaching askip person. There are two types of indirect skips, the taxable termination andthe taxable distribution.
• A direct skip is a property transfer made to a skip person that is subject to anestate of gift tax. An example of a direct skip would b a grandmother giftingproperty to a grandchild. The transferor, or his or her estate, is responsible forpaying the GST tax for direct skips.
• Indirect skips involve transfers that have intermediate steps before reaching askip person. There are two types of indirect skips, the taxable termination andthe taxable distribution.
Grandparent
GrandChild
Trust with incomebeneficiary as
childUpon the death of child
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What is GST Exemption (IRC Section §2632)?
• Under section 2631(a) each individual is allowed to give away duringhis or her lifetime up to $5,430,000 (for year 2015) without any federalgift or estate taxes due to the historically high exemption for federaltransfer tax purposes. The same exemption amount applies forgeneration-skipping transfer (GST) tax purposes this year.
• Under section 2632(a), an allocation of an individual’s GST exemptionmay be made at any time on or before the date prescribed for filingthe estate tax return for the individual’s estate (determined withregard to extensions).
• Under section 2631(a) each individual is allowed to give away duringhis or her lifetime up to $5,430,000 (for year 2015) without any federalgift or estate taxes due to the historically high exemption for federaltransfer tax purposes. The same exemption amount applies forgeneration-skipping transfer (GST) tax purposes this year.
• Under section 2632(a), an allocation of an individual’s GST exemptionmay be made at any time on or before the date prescribed for filingthe estate tax return for the individual’s estate (determined withregard to extensions).
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Deemed AllocationIRC Sect. 2632(b)
• Section 2632 also provides deemed allocation rules pursuant to whichan individual’s available GST exemption is automatically allocated tocertain kinds of transfers, without any action on the part of thetransferor.
• Under section 2632(b), an individual’s unused GST exemption isautomatically allocated to transfers made during that individual’slifetime that are direct skips as defined in section 2612(c), to theextent necessary to make the inclusion ratio zero for the propertytransferred.
• The unused portion of an individual’s GST exemption is that portion ofsuch exemption which has not previously been allocated by suchindividual
• Section 2632 also provides deemed allocation rules pursuant to whichan individual’s available GST exemption is automatically allocated tocertain kinds of transfers, without any action on the part of thetransferor.
• Under section 2632(b), an individual’s unused GST exemption isautomatically allocated to transfers made during that individual’slifetime that are direct skips as defined in section 2612(c), to theextent necessary to make the inclusion ratio zero for the propertytransferred.
• The unused portion of an individual’s GST exemption is that portion ofsuch exemption which has not previously been allocated by suchindividual
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GST Annual Exclusion
• Currently $14,000
• Available to direct skips
• Available to trust if:
– During the life of the beneficiary, no distributionsmay be made to anyone but the beneficiary; and
– At the beneficiary's death, the trust assets will beincluded in the beneficiary’s gross estate.
• Currently $14,000
• Available to direct skips
• Available to trust if:
– During the life of the beneficiary, no distributionsmay be made to anyone but the beneficiary; and
– At the beneficiary's death, the trust assets will beincluded in the beneficiary’s gross estate.
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GST Annual Exclusion
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Automatic AllocationIRC Sect. 2632(c)
• Under section 2632(c), in the case of a lifetime transfer made after December31, 2000, that is an indirect skip, the transferor’s available GST exemption isautomatically allocated to the transfer to the extent necessary to make theinclusion ratio zero for the property transferred.
• Under section 2632(c)(5)(A)(i)(I), an individual may elect out of the deemedallocation rules so that GST exemption will not be allocated automatically to aparticular transfer that is an indirect skip.
• Under section 2632(c)(5)(B)(i), this election out with regard to a particularindirect skip shall be deemed timely if made on a timely filed gift tax return forthe calendar year in which the transfer was made, or deemed to have beenmade under section 2632(c)(4) with regard to trusts subject to an estate taxinclusion period, or on such later dates as may be prescribed in regulations.
• Under section 2632(c), in the case of a lifetime transfer made after December31, 2000, that is an indirect skip, the transferor’s available GST exemption isautomatically allocated to the transfer to the extent necessary to make theinclusion ratio zero for the property transferred.
• Under section 2632(c)(5)(A)(i)(I), an individual may elect out of the deemedallocation rules so that GST exemption will not be allocated automatically to aparticular transfer that is an indirect skip.
• Under section 2632(c)(5)(B)(i), this election out with regard to a particularindirect skip shall be deemed timely if made on a timely filed gift tax return forthe calendar year in which the transfer was made, or deemed to have beenmade under section 2632(c)(4) with regard to trusts subject to an estate taxinclusion period, or on such later dates as may be prescribed in regulations.
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Automatic Allocation Rules
• Direct skips
• Indirect: GST trusts
A GST trust is a trust that could have ataxable termination or taxable distributionunless certain exceptions apply.
Note: A conventional insurance trust where thespouse is a beneficiary and that provides for thepossibility of trusts for descendents after thespouse’s death is a GST trust.
• Direct skips
• Indirect: GST trusts
A GST trust is a trust that could have ataxable termination or taxable distributionunless certain exceptions apply.
Note: A conventional insurance trust where thespouse is a beneficiary and that provides for thepossibility of trusts for descendents after thespouse’s death is a GST trust.
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IRC §2632(c)(3)(B) Definitionof a “GST Trust”
A Trust is a GST Trust unless:• More than 25% of corpus distributable to non-skip
person before such person attains the age of 46• More than 25% of corpus distributable to non-skip
persons living on date of death of another person whois more than 10 years old than such non-skip persons
• More than 25% of corpus subject to general power ofappointment held by non-skip persons
• Any portion of trust includable in estate of non-skipperson if such person died immediately after transfer
• Certain types of charitable trusts (i.e. CLATs)
A Trust is a GST Trust unless:• More than 25% of corpus distributable to non-skip
person before such person attains the age of 46• More than 25% of corpus distributable to non-skip
persons living on date of death of another person whois more than 10 years old than such non-skip persons
• More than 25% of corpus subject to general power ofappointment held by non-skip persons
• Any portion of trust includable in estate of non-skipperson if such person died immediately after transfer
• Certain types of charitable trusts (i.e. CLATs)
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Sample Gift to Dynasty Trust
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Opt Out / Opt In of Automatic Allocation
The method for opting in or out of automaticallocation is the same.• Check the 2632 election box.• Attach a statement to the return that includes
a description of the transfer and the extent towhich the automatic allocation is to apply (ornot apply).
• An election can be made for all futuretransfers to a particular trust (you cansubsequently elect to have the allocation rulesapply).
• Once an election is made, it is irrevocableafter the due date of the return.
The method for opting in or out of automaticallocation is the same.• Check the 2632 election box.• Attach a statement to the return that includes
a description of the transfer and the extent towhich the automatic allocation is to apply (ornot apply).
• An election can be made for all futuretransfers to a particular trust (you cansubsequently elect to have the allocation rulesapply).
• Once an election is made, it is irrevocableafter the due date of the return. 46
Timely vs. Late GST Allocations
• For timely allocations, the date-of-giftvalue is used.
• For late allocations, the value as of thefirst of the month when the return isfiled is used.
• For timely allocations, the date-of-giftvalue is used.
• For late allocations, the value as of thefirst of the month when the return isfiled is used.
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Example
Bea Generous makes a $150,000 gift to theGenerous Dynasty Trust in 2009 but did notallocate GST Exemption on the gift tax return.Bea files a gift tax return in February 2014 inorder to allocate GST exemption to the trust.Bea must use the value of the trust assets onFebruary 1, 2014 to fully allocate GST exemptionto the trust.
Bea Generous makes a $150,000 gift to theGenerous Dynasty Trust in 2009 but did notallocate GST Exemption on the gift tax return.Bea files a gift tax return in February 2014 inorder to allocate GST exemption to the trust.Bea must use the value of the trust assets onFebruary 1, 2014 to fully allocate GST exemptionto the trust.
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Late Allocations of GST ExemptionProcedural Requirements
• File a Form 709 for the year of the transfer to the trust, regardless of whether aForm 709 had been previously filed for that year. State at the top of the Form 709that the return is “FILED PURSUANT TO REV. PROC. 2004-46.”
• Report on the Form 709 the value of the transferred property as of the date of thetransfer.
• Allocate GST exemption to the trust by attaching a statement to the Form 709entitled “Notice of Allocation.” The notice of allocation must contain the followinginformation:
– clear identification of the trust, including the trust’s identifying number, as defined in § 6109and the regulations thereunder, when applicable;
– the value of the property transferred as of the date of the transfer (adjusted to account forsplit gifts, if any);
– the amount of taxpayer’s unused GST exemption at the time this Notice of Allocation is filed(taxpayers are reminded that they must have unused GST exemption at the time this Notice ofAllocation is filed);
– the amount of GST exemption allocated to the transfer;– the inclusion ratio of the trust after the allocation; and– a statement that all of the requirements of section 3.01 of this revenue procedure have been
met.
• File a Form 709 for the year of the transfer to the trust, regardless of whether aForm 709 had been previously filed for that year. State at the top of the Form 709that the return is “FILED PURSUANT TO REV. PROC. 2004-46.”
• Report on the Form 709 the value of the transferred property as of the date of thetransfer.
• Allocate GST exemption to the trust by attaching a statement to the Form 709entitled “Notice of Allocation.” The notice of allocation must contain the followinginformation:
– clear identification of the trust, including the trust’s identifying number, as defined in § 6109and the regulations thereunder, when applicable;
– the value of the property transferred as of the date of the transfer (adjusted to account forsplit gifts, if any);
– the amount of taxpayer’s unused GST exemption at the time this Notice of Allocation is filed(taxpayers are reminded that they must have unused GST exemption at the time this Notice ofAllocation is filed);
– the amount of GST exemption allocated to the transfer;– the inclusion ratio of the trust after the allocation; and– a statement that all of the requirements of section 3.01 of this revenue procedure have been
met.
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Important
Remember to adjust the amount of GSTexemption used in prior periods in which agift tax return was not filed.
Remember to adjust the amount of GSTexemption used in prior periods in which agift tax return was not filed.
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ExampleOn her 2008 gift tax return, Bea Generous opted to haveGST exemption allocated to all future gifts made to aCrummey trust. During 2009, 2010, 2011 and 2012, Beaonly made annual exclusion gifts to the trust in theamount of $120,000, so she did not file gift tax returnsfor these years.
When Bea files her 2013 return, the amount of GSTexemption used for prior years should be increased by$480,000 (4 years x $120,000 per year), the amountautomatically allocated during 2009, 2010, 2011 and2012.
On her 2008 gift tax return, Bea Generous opted to haveGST exemption allocated to all future gifts made to aCrummey trust. During 2009, 2010, 2011 and 2012, Beaonly made annual exclusion gifts to the trust in theamount of $120,000, so she did not file gift tax returnsfor these years.
When Bea files her 2013 return, the amount of GSTexemption used for prior years should be increased by$480,000 (4 years x $120,000 per year), the amountautomatically allocated during 2009, 2010, 2011 and2012.
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Overview of GRAT• Under the terms of a grantor retained annuity trust (“GRAT”), a
grantor transfers property to an irrevocable trust.• Every year for a specified number of years (the “annuity term”),
the trustee pays the grantor a fixed annuity amount.• The Annuity Amount – which is expressed as a percentage of
the initial fair market value of the property transferred to theGRAT – is set so that the present value of the amount to be paidto the grantor over the annuity term equals the amounttransferred to the GRAT, plus an assumed rate of return.
• At the end of the annuity term, the GRAT may continue to holdin trust property remaining in the GRAT (if any) for the benefit ofpersons other than the grantor (e.g., the grantor’s children) onsuch terms as the grantor specifies in the trust instrument.
• The GRAT may distribute any remaining trust property outrightto persons named in the trust instrument.
• Under the terms of a grantor retained annuity trust (“GRAT”), agrantor transfers property to an irrevocable trust.
• Every year for a specified number of years (the “annuity term”),the trustee pays the grantor a fixed annuity amount.
• The Annuity Amount – which is expressed as a percentage ofthe initial fair market value of the property transferred to theGRAT – is set so that the present value of the amount to be paidto the grantor over the annuity term equals the amounttransferred to the GRAT, plus an assumed rate of return.
• At the end of the annuity term, the GRAT may continue to holdin trust property remaining in the GRAT (if any) for the benefit ofpersons other than the grantor (e.g., the grantor’s children) onsuch terms as the grantor specifies in the trust instrument.
• The GRAT may distribute any remaining trust property outrightto persons named in the trust instrument.
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“Zero-ing Out” The GRAT• A GRAT is “zeroes out” for gift tax purposes when the annuity
amount paid by the trustee to the grantor is equal to the amounttransferred to the GRAT.
• The result of such a “zeroed-out” GRAT is that any appreciation inthe value of the property contributed to the GRAT in excess of anassumed rate of return can be distributed to the namedbeneficiaries at the end of the annuity term without any gift tax.
• If the property placed in the GRAT does not appreciate, orappreciates at a rate lower than the assumed rate of return, all ofthe property placed in the GRAT will be paid back to the grantorduring the annuity term and nothing will be left for the intendedbeneficiaries.
• A GRAT is “zeroes out” for gift tax purposes when the annuityamount paid by the trustee to the grantor is equal to the amounttransferred to the GRAT.
• The result of such a “zeroed-out” GRAT is that any appreciation inthe value of the property contributed to the GRAT in excess of anassumed rate of return can be distributed to the namedbeneficiaries at the end of the annuity term without any gift tax.
• If the property placed in the GRAT does not appreciate, orappreciates at a rate lower than the assumed rate of return, all ofthe property placed in the GRAT will be paid back to the grantorduring the annuity term and nothing will be left for the intendedbeneficiaries.
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Grantor Retained Annuity TrustReporting on Schedule A part 1
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Grantor Retained Annuity TrustReporting on Schedule A part 3
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Overview of ETIPAn ETIP is the period during which, should death occur, the value oftransferred property would be includible (other than by reason of section2035) in the gross estate of –
• (A) The transferor; or• (B) The spouse of the transferor.
The value of transferred property is not considered as being subject toinclusion in the gross estate of the transferor or the spouse of the transferor:
• If the possibility that the property will be included is so remote as to benegligible.
• A possibility is so remote as to be negligible if it can be ascertained byactuarial standards that there is less than a 5 percent probability thatthe property will be included in the gross estate.
• If the spouse possesses with respect to any transfer to the trust, a rightto withdraw no more than the greater of $5,000 or 5 percent of thetrust corpus, and such withdrawal right terminates no later than 60days after the transfer to the trust.
An ETIP is the period during which, should death occur, the value oftransferred property would be includible (other than by reason of section2035) in the gross estate of –
• (A) The transferor; or• (B) The spouse of the transferor.
The value of transferred property is not considered as being subject toinclusion in the gross estate of the transferor or the spouse of the transferor:
• If the possibility that the property will be included is so remote as to benegligible.
• A possibility is so remote as to be negligible if it can be ascertained byactuarial standards that there is less than a 5 percent probability thatthe property will be included in the gross estate.
• If the spouse possesses with respect to any transfer to the trust, a rightto withdraw no more than the greater of $5,000 or 5 percent of thetrust corpus, and such withdrawal right terminates no later than 60days after the transfer to the trust.
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Termination of an ETIPAn ETIP terminates on the first to occur of:
• The death of the transferor• The time at which no portion of the property is includible in the
transferor's gross estate (other than by reason of section 2035) or, in thecase of an individual who is a transferor solely by reason of an electionunder section 2513, the time at which no portion would be includible inthe gross estate of the individual's spouse (other than by reason ofsection 2035)
• The time of a GST, but only with respect to the property involved in theGST; or
• In the case of an ETIP arising by reason of an interest or power held by thetransferor's spouse and at the first to occur of—
– (A) The death of the spouse; or– (B) The time at which no portion of the property would be includible
in the spouse's gross estate (other than by reason of section 2035).
An ETIP terminates on the first to occur of:• The death of the transferor• The time at which no portion of the property is includible in the
transferor's gross estate (other than by reason of section 2035) or, in thecase of an individual who is a transferor solely by reason of an electionunder section 2513, the time at which no portion would be includible inthe gross estate of the individual's spouse (other than by reason ofsection 2035)
• The time of a GST, but only with respect to the property involved in theGST; or
• In the case of an ETIP arising by reason of an interest or power held by thetransferor's spouse and at the first to occur of—
– (A) The death of the spouse; or– (B) The time at which no portion of the property would be includible
in the spouse's gross estate (other than by reason of section 2035).
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Thank You For Attending!
This presentation was not intended or written to beused, and cannot be used by any taxpayer, for thepurpose of avoiding penalties under U.S. federal taxlaw.
Thank You For Attending!
This presentation was not intended or written to beused, and cannot be used by any taxpayer, for thepurpose of avoiding penalties under U.S. federal taxlaw.
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Tracy M. Child, JD, LLMSherman Wells Sylvester & Stamelman LLP54 West 40th StreetNew York, NY [email protected]
Tracy Child is a partner at the law firm of Sherman Wells Sylvester & Stamelman, aNew Jersey based full service firm. She is a member of the Firm’s Trusts & EstatesGroup, where she assists individuals and families with a broad range of estateplanning, estate administration, family business succession planning and related taxwork. In the course of doing so, Tracy counsels clients on establishing an estateplan that meets their needs and objectives as tax-efficiently as possible.
Prior to attending law school, Tracy was a senior tax associate with Deloitte andTouche LLP and at Arthur Andersen LLP.
Tracy also serves as the partner-in-charge of the Firm’s New York office.
Tracy Child is a partner at the law firm of Sherman Wells Sylvester & Stamelman, aNew Jersey based full service firm. She is a member of the Firm’s Trusts & EstatesGroup, where she assists individuals and families with a broad range of estateplanning, estate administration, family business succession planning and related taxwork. In the course of doing so, Tracy counsels clients on establishing an estateplan that meets their needs and objectives as tax-efficiently as possible.
Prior to attending law school, Tracy was a senior tax associate with Deloitte andTouche LLP and at Arthur Andersen LLP.
Tracy also serves as the partner-in-charge of the Firm’s New York office.
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Joy Matak, JD, LLMCohnReznick LLP4 Becker Farm RoadP.O. Box 954Roseland, NJ [email protected]
Joy Matak, JD, LLM, is a tax director at CohnReznick and a member of the Firm’sNational Trusts and Estates Practice. Joy has more than 18 years of diversifiedexperience with an extensive background in providing tax services to multi-generational wealth families, owners of closely-held businesses, and high-net-worthindividuals and their trusts and estates.
Joy has significant expertise providing her clients with diverse wealth transferstrategy planning to accomplish estate planning and business succession goals.She also performs tax compliance, including gift tax, estate tax, and income taxreturns for trusts and estates, as well as consulting services related to generationskipping, including transfer tax planning, asset protection, life insurance structuring,and post-mortem planning.
Joy Matak, JD, LLM, is a tax director at CohnReznick and a member of the Firm’sNational Trusts and Estates Practice. Joy has more than 18 years of diversifiedexperience with an extensive background in providing tax services to multi-generational wealth families, owners of closely-held businesses, and high-net-worthindividuals and their trusts and estates.
Joy has significant expertise providing her clients with diverse wealth transferstrategy planning to accomplish estate planning and business succession goals.She also performs tax compliance, including gift tax, estate tax, and income taxreturns for trusts and estates, as well as consulting services related to generationskipping, including transfer tax planning, asset protection, life insurance structuring,and post-mortem planning.
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