A Guide to Allocation of Generation Skipping Tax (GST ...



Form 709 Preparers Ask,

“Why Elect Out Of the GST Automatic Allocation Scheme?” and

“Should One Elect Out For Crummey Life Insurance Trusts?”

© Finis Cowan JD, CPA

LLM Tax Candidate

University of Houston Law Center

fcowan@

July 31, 2009

Table of Contents (§ References are to IRC).

1. Short Answer: Elect out for appreciating assets. Crummey ILITs __________________2

2. Purpose and Scope of Article……………………………………………………..2

3. Caveat re: Anticipated Statutory Amendment…………………………………….3

4. GST Exemption Allocation Basics..………………………………………………3

o Exemption § 2631

o Deemed Allocation § 2632

o Zero Inclusion Ratio Means No GST Tax § 2642………………………4

o Election Planning………………………………………………………..5

o Complete v. Partial Allocation…………………………………………..5

o Annual Exclusion Only To Direct Skips and Qualified Trusts ………...6

o Qualified Trust 2642(c)………………………………………………….6

o Valuation Timing………………………………………………………...6

1. Automatic Allocations……………………………………7

2. Timely 709………………………………………………..7

3. Late 709, Electing Out……………………………………7

4. Other Returns……………………………………………..7

5. Indirect Skip, ETIP……………………………………….7

5. Deemed Allocation

o Explanation Of Statutory Terms § 2632(b)-(c)…………………..7

o Preventing Deemed Allocations

o Form 709 Unnecessary But Good Recordkeeping

o Order of Deemed Application § 2642(e)……………………………….7

o MOVE GST Trust UP HERE

o

6. Preventing Deemed Allocations

1. Reasons For Electing Out

2. How To Elect Out For Lifetime Transfers

3. Notice Of Allocation

4. Formula

5. Timing 8

6. Options

Electing Out of the Deemed Allocation Rules for Lifetime Indirect Skips:

Timely Filing

5 Allocation Options:

Use of Form 709……………………………………………………………….9

Trusts Should Use Formula……………………………………………………10

GST Trusts

Termination of Election Out……………………………………………………

Late allocations…………………………………………………………………11

NEED SECTION HERE FOR NON-EXTENSION LATE ALLOCS, IE., WAIT & SEE

• Protective allocation to special use property      30D

• 2503(c) trusts for benefit of minors      E301; 30A = GST Trusts?

• Intentional Late Elections

• Relief for late allocations where good faith and no IRS prejudice 11

First day of month value election, except if life insurance and death?

o Notice of Allocation………………………………………………12

o Substantial Compliance…………………………………………..13

Crummey ILITs – Whether To Allocate Or Not

Term Insurance

Non-Term

Deemed or Affirmative Allocation

• Table of Authorities

• Appendix A: Checklist For Information and Documents Needed

• Appendix B: Checklist For Information and Documents Needed For ILIT Allocation

Short Answer: Elect out for appreciating property and indirect transfers. For Crummey Trusts, it depends.

Purpose and Scope of Article: A first-time preparer of IRS form 709 (gift/GST tax) is likely to be confused as to whether to elect to not follow the automatic GST exemption allocation scheme.[1] The reasons are not in the form’s instructions,[2] IRC § 2632 or Reg § 26.2632-1.[3] This article is intended to familiarize the beginner or generalist return preparer with the rationales for electing out of the deemed allocation scheme and for affirmatively allocating the exemption for GST transfers during the transferor’s lifetime.

Caveat Re: Anticipated Changes: For 2009, the lifetime GST tax exemption (like the estate tax exemption) is $3.5 million per individual and $7 million per married couple. Absent probable Congressional amendment,[4] there will be no GST or estate tax in 2010 and starting in 2011, the GST tax and exemption will revert to the year 2001 rules, and a lifetime exemption of $1 million adjusted for inflation and the 55% GST tax rate will apply again.[5] “Total permanent repeal is doubtful”[6] but just in case amendment is delayed it would be wise to avoid strategies that trigger GST and gift taxes payable in 2009 that might not be owed if the transfer is delayed to 2010. Practitioners should monitor Congressional developments.

GST Exemption Allocation Basics:[7]

1. Exemption: Each individual may transfer a maximum cumulative amount of property ($3.5 million in 2009) during life or at death free of the GST tax. [8] This exemption may be allocated by transferors against their lifetime gifts on Form 709 and by the transferor's executor on Form 706.[9] IRC § 2631(a). The allocation is made to transfers or to trusts, not to transferees.[10] For a direct skip transfers to a trust, allocations are made to the entire trust rather than to specific assets. Reg. Sec. 26.2632-1(a).

2. Deemed Allocation provisions of IRC § 2632(b)-(c) “represent the IRS’ attempt to alleviate the harsh consequences of misunderstanding the complex GST tax rules,”[11] to “minimize the risk that the exemption will be overlooked,”[12] and automatically apply if the transferor or executor fails to affirmatively allocate the exemption to a particular transfer. However, reliance on this default rule may result in significant additional taxes. Electing out of the default rule and properly allocating the exemption can avoid GST tax on future appreciation.[13] Timely affirmative use of the exemption can shield more than the nominal ($3.5 million in 2009) GST exemption (“leveraging”) by shielding future appreciation from GST tax.[14] PPC[15] Example 29D-1 demonstrates this opportunity:

“Jake Brown transferred property worth $1 million to a trust, (elected out of the deemed allocation rule and affirmatively) allocated $1 million of his GST tax exemption to the trust. Ten years later, the value of the trust property had increased to $3 million, at which time, a taxable termination occurred. Even though the trust property had increased in value, the entire $3 million of property is exempt from the GST tax on the taxable termination.

If a late allocation (under the automatic rule) was made at the time of the taxable termination, a GST tax of $450,000 would result [($3 million − $2 million GST tax exemption) × .45], assuming the taxable termination was in 2008.”

Form 709 need not be filed to report an automatic allocation. “Nevertheless, it is often desirable to do so for record keeping and to begin the running of the statute of limitations on the valuation of the gift and the inclusion ratio. IRC § 6501(a).”[16]

3. Zero Inclusion Ratio Means No GST Tax. The GST exemption “is not a true exemption from GST tax, nor does it operate as a credit against tax as the applicable (annual) exclusion amount does. Rather, it is a rate reducer. The effective rate of generation-skipping tax (called the “applicable rate,” I.R.C. § 2641) is determined by multiplying the “inclusion ratio” (I.R.C. § 2642(a)), which essentially is the percentage of the property to which GST exemption has not been allocated, by the maximum federal estate tax rate (45% in 2009).”[17]

IRC § 2632(b) and(c) provide for automatic allocation of an individual’s available GST exemption to lifetime direct skips and to indirect skips to a ‘GST Trust “to the extent necessary to produce an inclusion ratio of zero,”[18] i.e., to the extent necessary to avoid GST tax.[19] The trust’s inclusion ratio will need to be recalculated when additional GST tax exemption is allocated to the trust and when additional property is contributed to the trust.[20]

4. Election Planning: The “goal is to ensure that all trusts are assigned an inclusion ratio of either zero or one; that is, either wholly exempt or wholly taxable. A fractional inclusion ratio results in the ‘wasting’ of the transferor's GST tax exemption and the likelihood of unnecessary taxation.”[21]

Separate GST-Exempt and Non-Exempt Trusts: The usual practice “when property will be placed in trust and the generation skipping transfer will occur at a later time, (is) to allocate GST exemption to one trust (or group of trusts) so that it (or they) will be entirely exempt from the tax and for the other trust (or trusts) to not be exempt at all, rather than creating partially exempt trusts.”[22] This may be accomplished by use of a qualified severance. IRC §§ 2632, 2642(a).

An exempt trust is created by allocating a sufficient amount of the exemption to achieve a zero inclusion ratio. The exempt trust should be used to (1) make generation skipping transfers and (2) hold property that has the potential for significant appreciation since the appreciation would be exempt from GST tax.

A nonexempt trust should (1) have no exemption allocated to it and (2) be used for making distributions which are not generation skipping. [23]

Complete vs. Partial Allocations: Where a trust has been allocated an amount of the transferor's exemption equal to the entire amount of the trust, “distributions or terminations therefrom will always be exempt from GST tax, regardless of the amount to which the trust may have grown in the interim.”[24]

“A partial allocation of the transferor's GST tax exemption to a generation-skipping transfer, on the other hand, will always result in a GST tax.”[25] That is, if the amount of exemption allocated is less than the transfer, GST tax is owed for that year. Accelerating the tax may still be cheaper in the long run than incurring tax on appreciation, e.g., wouldn’t you rather pay tax on the life insurance premiums than the proceeds?

The GST tax exemption may be allocated even if there is no current generation-skipping transfer, e.g., it is permissible to allocate a portion of the GST exemption upon the funding of a trust for the benefit of the transferor's child and grandchild.[26]

Annual Exclusions:[27] The annual gift and GST exclusions are the same quantitatively ($13,000 for 2009) but not qualitatively. The GST exclusion only applies to direct skips which are outright transfers directly to skip persons and transfers to “qualified trusts.”[28] IRC § 2642(c). No GST exemption allocation or election is necessary if such transfers are below the annual exclusion[29] or for direct medical or tuition payments.[30]

The GST tax annual exclusion does not apply to direct skip transfers in trust for the benefit of an individual unless the trust is a “qualified trust.” A qualified trust provides that:

1. Distributions cannot be made to anyone other than the grandchild or other skip person during the grandchild’s or other skip person’s life; and

2. If the grandchild or other skip person dies prior to the termination of the trust, the trust assets must be included in the grandchild’s or other skip person’s estate. IRC Sec. 2642(c)

If these two conditions are not met, the annual exclusion will not be available for GST tax purposes, and the donor’s lifetime GST tax exemption will have to be allocated to shelter the transfer from the tax.[31] The inapplicability of the GST annual exclusion to most Crummey trusts is discussed more fully below.

Other than for direct skips and qualified trusts, Form 709 must be filed to elect out of the deemed allocation rule, even if the annual gift tax exclusion would normally apply. See Form 709 Instructions and Regs. § 26.2632-1.

Valuation Timing is the key to maximizing the value of the GST exemption. .

“The transferor or his executor may allocate the GST exemption at any time from the date of the transfer through the date for filing the estate tax return.” Regs. § 26.2632-1(a). However, the timing (or deemed effective date) of the allocation and the type of transfer determine the amount of exemption allocated

Automatic Allocations To Lifetime Direct Skips and Qualified Trusts[32] are “effective as of the date of the transfer.” Reg. 26.2632-1(b)(ii) and (iii)(2). This means the value of the allocation is the value on the date of the transfer whether or not a Form 709 is filed. Id.

Timely 709: For allocations made on Form 709 for the year of the transfer (whether automatic or affirmative), the value of the transfer is the value on the date of transfer. IRC Section 2632(c); Reg. Section 26-2642-2(a)(1). Thus, the value at the time of the transfer can be locked in by filing Form 709.

Late 709, Electing Out: If a Form 709 allocating the exemption was not timely filed for the year of the GST transfer and the transferor wishes to elect out of the deemed allocation rule, the value of the transfer for GST exemption allocation purposes is the value at the date the affirmative allocation on a subsequent Form 709is filed.[33].IRC Sec. 2642(b)(3). The consequence of delaying the Form 709 is to include changes in value.

Other Returns: If, however, the allocation is made on any other return,[34] it becomes irrevocable on the date the return making the allocation is filed, and the value of the property for purposes of using the exemption is generally its value on that later date, including changes in value.”[35] IRC § 2642(b)(1)

Indirect Skip, ETIP (Estate Tax Inclusion Period): Transfers are deemed to be made and the exemption is deemed to be allocated at the close of the ETIP. IRC. Sec. 2642(c)(4) and (f); Reg. 26.2632-1(b)(2).

Deemed Allocations, Explanation of Statutory Language:

IRC § 2632(b) provides for deemed allocations of the GST exemption to certain “direct lifetime skips,” e.g. transfers during grantors’ lifetimes to grandchildren or others deemed two or more generations (“skip persons”) below the grantors . . .“(A)ny unused portion of such individual’s GST exemption shall be allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero” means that the default scheme applies the balance of the exemption to the extent necessary to make the transfer free of GST tax. If there is not enough GST exemption, it is allocated to the extent necessary to produce the lowest possible inclusion ratio for the property, i.e., the lowest GST tax possible on that property.

IRC 2632(c) applies the same deemed allocation method to “indirect skips,” i.e., certain lifetime transfers to “GST trusts.” A GST trust is any trust that may incur GST tax unless five alternative conditions apply that indicate significant benefits will go to non-skip persons, (e.g., grantor’s children rather than her grandchildren) or is not certain charitable trusts.

IRC § 2632(c)(4) provides an automatic allocation rule for property subject to an estate tax inclusion period (‘ETIP’)” [36] Such indirect skips are “shall be deemed to have been made only at the close of the estate tax inclusion period. The fair market value of such transfer shall be the fair market value of the trust property at the close of the estate tax inclusion period.” EXPLAIN SIMPLY

Order of Automatic Application: “Absent a contrary election by the transferor, the GST exemption applies: (a) first, to all lifetime direct skips or inter-vivos trusts from which a generation-skipping transfer may occur; (b) second, to testamentary direct skips; and (c) lastly, to other trusts from which a taxable termination or a taxable distribution may occur.”[37] IRC § 2632(e). Uncertainties about the effect of this provision for taxpayers with multiple trusts encourage affirmative exemption allocation.

Preventing Deemed Allocations

Reasons to elect out:

1. To offset future transfers, usually future transfers of property with appreciation potential.

2. To “reallocate the exemption away from a direct skip to a trust with the potential of accumulating income and appreciating before the occurrence of a taxable distribution or termination at some future time.”[38] This choice would be particularly valuable if the grantor had only a limited amount of remaining GST exemption available and had to choose between its allocation for cash gifts and gifts with growth potential.

3. Where “trust property has gone down in value after the transfer was made and there is no likelihood of recovery.”[39]

Even if some GST tax must be paid now as a result of electing out, “it may be possible to achieve GST tax savings greatly in excess of the amount (of tax) paid up-front.”[40]

How To Elect Out:

For lifetime transfers, elect out of the automatic allocation rules by checking Form 709, column C, Schedule A, Part 2, describing the transfer and the extent to which the automatic allocation is not to apply, timely filing it and paying any GST tax shown on the return. Alternatively, the transferor can elect out of the automatic allocation rules by attaching a statement to Form 709 describing the transaction and the extent to which the automatic allocation should not apply and paying the GST tax. The allocation of the GST tax exemption to lifetime transfers (other than a direct or indirect skip) is made on a Notice of Allocation attached to Form 709.[41]

Good Recordkeeping To Use Form 709 Even If Automatic Allocation: Although express allocation of the GST tax exemption allocation is not required if the exemption is automatically allocated, making a record of deemed allocations on Form 709 is a prudent way to track the use of the GST tax exemption. Both affirmative allocations and deemed allocations of the exemption to lifetime direct skips can be made on Form 709. The GST tax exemption is allocated on an item by item basis on Part 3 (Tax Computation), column C. Affirmatively electing to allocate the exemption by reporting it on Form 709, Schedule C, Part 2, line 6 and attaching a Notice of Allocation “provides a clear record of the taxpayer’s intent to have GST tax exemption allocated to the trust and exactly how much exemption has been allocated.”[42]

Electing Out of the Deemed Allocation Rules for Lifetime Indirect Skips:

“The automatic allocation rules never should be relied upon to determine the inclusion ratio in the case of indirect skip transfers.”[43] WHY NOT?

The election will be considered to be timely if filed on a timely-filed (including extensions actually granted) gift tax return for the calendar year in which:

1. the first transfer to be covered by the election out was made, or

2. the ETIP closes, for transfers subject to an ETIP. IRC Sec. 2632(c)(5).

Allocation Options: The five separate elections regarding prior, current and future transfers provide considerable flexibility. Reg. 26.2632-1(b)(2)(iii)(A)

“With respect to future transfers, the transferor may choose to elect out even if a current-year transfer has not yet been made and even if the transferor is not otherwise required to file a gift tax return.” T.D. 9208, Internal Revenue Bulletin: 2005-31 (August 1, 2005).”[44]

Form 709, Schedule A, Part 3 tracks the use of the GST tax exemption automatically allocated to indirect skip transfers and provides a mechanism for electing out of these deemed allocation rules. The election is made by indicating (on Form 709, Schedule A, Part 3, Column C) each transfer the transferor wants to exclude from the deemed allocation rules. In addition, a statement must be attached to a timely filed Form 709 for the year in which the election is desired.

Trusts Should Use Formula: The affirmative allocation of the transferor’s GST tax exemption may be made by specific dollar amount but should be made by a formula. A formula allocation avoids the risk that insufficient exemption will be allocated to a transfer in the event the value of the transferred asset is changed on audit. The formula may express the allocation as “an amount necessary to produce an inclusion ratio of zero.” Reg. 26.2632-1(b)(4)(i).

GST Trust. A “GST trust” is a trust that could have a generation-skipping transfer with respect to the transferor unless six important exceptions apply. [IRC Sec. 2632(c)(3)(B)]: The exceptions “are intended to cover those instances where the deemed allocation of GST tax exemption would be inappropriate because of a reduced likelihood that the trust will ultimately have a generation-skipping transfer . . .”[45] An exception to the six exceptions may apply with regard to indirect skips if the property transferred to a GST trust will not be includable in the gross estate of a nonskip person or subject to a right of withdrawal by a nonskip person to the extent such right is restricted to the gift tax annual exclusion amount. It is presumed for indirect skips that powers of appointment held by nonskip persons will not be exercised. IRC Sec. 2632(c)(3)(B).

Julie Kwon explains that the election scheme of the 2005 final regulations (T.D. 9208) obviate the difficulty of determining whether transfers to a trust are subject to automatic allocation. “Instead of parsing the statutory definition of ‘GST trust’ each time a transfer to a trust occurs, the advisor can simply elect ‘in’ or ‘out’ with respect to all transfers to the trust . . . no further action would be necessary to prevent unintended allocations . . . until circumstances change . . .”[46]

Election to Treat Trust as a GST Trust. A transferor may elect to treat any trust as a GST trust to effectively rely on the automatic allocation rules. IRC Sec. 2632(c) (5)(A)(ii). One could do so to allow application of the deemed allocation method to trusts that may not otherwise qualify as a GST trusts, e.g. ones that provide significant benefits to a non-skip person. Reg. 26.2632-1(3)(iii) This may also be done when gifts to the trust in subsequent years would not otherwise create a gift tax filing requirement. The election is terminable.

It is recommended that one “determine (i) which GST trusts are not, in fact, intended to receive a portion of the client's GST tax exemption, and (ii) which trusts that do not qualify as ‘GST trusts’ are, in fact, intended to receive a portion of the client's GST tax exemption and have the client ‘opt-in’ or ‘opt-out’ of deemed GST tax exemption allocation . . .”[47]

Termination of Election Out. If circumstances change, the election out of the deemed allocation rule can be terminated in a subsequent year by attaching a statement to a timely filed Form 709 for the year for which the first transfer was made to which the election out is lifted (even if a gift tax return would not otherwise be required). Reg. 26.2632-1(b)(2)(iii)(E). For example if a transferor had earlier elected to not have the exemption apply to any future transfers but later decided to transfer property with upside potential, he should terminate the earlier election.

Relief for Late Allocations of the GST Tax Exemption Regs Final????

The 2001 Tax Act provided relief for inadvertently missed GST tax exemption allocations. IRC Sec. 2642(g). Transferors falling under these relief provisions get to allocate exemptions based on the date of transfer values. “Generally, for transfers subject to estate or gift tax made after 2000, the IRS is directed to grant extensions of time to make the election to allocate the GST tax exemption or to elect out of the automatic allocation rules and to grant exceptions to the time requirement without regard to whether any limitation period has expired.”[48] There are numerous PLRs granting extensions of time to make GST exemption allocations under Reg. 301.9100.[49]

Prop. Reg. §26.2642-7[50] provides specific guidance for seeking an extension of time through a PLR to make late allocations/elections. It applies to taxpayers seeking to:

• make an affirmative allocation,

• elect out of the deemed allocation rule, or

• elect to treat a trust as a §2632(c) GST trust

Requests for relief will be granted when the taxpayer establishes that the transferor acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government.[51] In most of the numerous PLRs, the taxpayer relied on a tax practitioner.

Simplified Method for Relief: Rev. Proc. 2004-46 provides an alternative to the PLR process to obtain an extension of time to timely allocate the GST tax exemption for taxpayers meets the following requirements:

1. on or before December 31, 2000, the taxpayer made or was deemed to have made a transfer by gift to a trust from which a GST may be made;

2. no taxable distributions have been made and no taxable terminations have occurred;

3. the transfer qualified for the annual exclusion under IRC Sec. 2503(b) and the transfer, when added to the value of the other gifts to that donee in the same year, did not exceed the annual exclusion for the year;

4. no GST tax exemption was allocated to the transfer; and

5. the taxpayer has an unused GST tax exemption available to allocate to the transfer.

In order to obtain the extension under these simplified procedures, the taxpayer must:

1. file a Form 709 for the year of the transfer (regardless of whether they have previously filed for that year) indicating at the top of the form that it is “FILED PURSUANT TO REV. PROC. 2004-46”;

2. report on the Form 709 the value of the transferred property as of the date of transfer;

3. allocate the GST tax exemption to the trust by attaching a statement to the Form 709 entitled “Notice of Allocation.”

According to Reg. 26.2632-1(b)(4)(i) and the Form 709 instructions, the Notice of Allocation should identify:

1. The trust to which the allocation is made, including the trust’s EIN if known.

2. If applicable, the item number(s) from column A, Schedule A, Part 3 of the transfers, i.e., the value of the property transferred as of the date of transfer;

3. If the allocation is late, the year the transfer was reported on Form 709.

4. The amount of the taxpayer’s unused GST tax exemption at the time the Notice of Allocation is filed.

5. The amount of GST tax exemption allocated to it (or a statement that the exemption is being allocated by means of a formula).

5. The value (as shown in column H of Schedule A, Part 3) of the gift or, if the allocation is late, the value of the assets at the time of allocation.

6. The inclusion ratio of the trust after the allocation.

7. A statement that all of the requirements of section 3.01 of Rev. Proc. 2004-46 have been met.

The Notice of Allocation is also used to allocate the GST tax exemption to transfers that qualify for the gift tax annual exclusion but not the GST tax annual exclusion. Generally, such transfers are to Crummey trusts.

Substantial Compliance with the GST Tax Exemption Allocation Requirements with the requirements for allocating the GST tax exemption will suffice to establish that the exemption was allocated to a particular transfer or a particular trust. Include sufficient information with the return for determining the taxpayer’s intent to make the allocation of the GST tax exemption. If substantial compliance is shown, unused GST tax exemption will be allocated to the extent it produces the lowest possible inclusion ratio. All trust or transfer instruments will be considered and may need to be amended or supplemented.

Intentional Late Allocation of the GST Tax Exemption

If one has not filed a timely 709 allocating GST exemption, one has two general options:

1. If the transferor can prove that she intended to make the GST tax exemption allocation every year as transfers were made to the trust, she can request an extension of time to make the allocation. If such extension is granted, she can allocate her GST tax exemption as of the date of each transfer

2. The other option is to make a late allocation of her GST tax exemption. Because a portion of the exemption was automatically allocated to the transfers, “the current inclusion ratio of the trust must be determined at each of the previous transfer dates. To determine the inclusion ratio, the policy’s value immediately before each of the transfers and the value of the policy at the time of the late allocation must be obtained. Generally, this information can be obtained from the life insurance company that carries the policy. The trust’s inclusion ratio must be calculated each time an allocation of the GST tax exemption is made.”[52] Attach a copy of the calculation of the applicable fractions and inclusion ratios to the Form 709 in addition to a Notice of Allocation. The allocation should be reported on Form 709, Schedule C, Part 2, line 6.[53]

PPC Example 30B-2 explains that the potential benefit a late allocation of GST tax exemption after electing out of any automatic allocation to a Crummey life insurance trust “lies in the fact that the value of the trust is generally lower after the premium has been paid, rather than on the date of trust funding; thus, a late allocation may use less GST tax exemption. The value of the trust decreases by the amount of the premium payment, while increasing only by the addition to the policy’s cash surrender value.”

The risk of a late allocation of the GST tax exemption is that if the transferor dies (or be diagnosed with a terminable illness) before the allocation is made, a larger amount of exemption may be needed to get a zero inclusion ratio and possibly subjecting the entire value of the trust, e.g., the proceeds of a life insurance policy, to GST tax.

Absent an election out of the deemed allocation rule, direct skips made during life use up the GST tax exemption first. If an individual makes a lifetime direct skip, any unused portion of the GST tax exemption is automatically allocated to the transferred property to the extent necessary to make the inclusion ratio zero [IRC Sec. 2632(b)(1)].

GST Not Eligible for Annual Exclusion

The Notice of Allocation is also used to allocate the GST tax exemption to gifts that qualify for the gift tax annual exclusion but not the GST tax annual exclusion. Generally, the gifts are to Crummey type trusts where beneficiaries have withdrawal powers that make transfers to the trust eligible for the gift tax annual exclusion but not the GST tax annual exclusion because of the requirements of IRC Sec. 2642(c)(2) (discussed in Key Issue 30A).

Example 30B-2: Gift to ILIT with Crummey Powers and Indirect Skip

Retroactive Allocation If “Unnatural Order of Death”: If a child dies before the transferor, a trust might terminate in favor of the grandchild, unexpectedly imposing GST tax even though the transferor had some unused GST exemption. IRC 2632(d)(1) allows retroactive allocation of the GST tax exemption under these circumstances.[54]

Indirect Skips Subject to an Estate Tax Inclusion Period (ETIP). An indirect skip to a trust that is subject to an ETIP is subject to the deemed allocation rules. For an ETIP, the GST tax exemption is automatically allocated at the end of the ETIP based on the value of the property at the termination of the ETIP [IRC Sec. 2632(c)(4)]. In the case of an indirect skip subject to an ETIP, the indirect skip is deemed to occur at the end of an ETIP. Thus, automatic allocation of the GST tax exemption occurs at the end of the ETIP. The election out of the automatic allocation must be made on or before the due date (including extensions actually granted) of Form 709 for the calendar year in which the ETIP closes [Reg. 26.2632-1(b)(2)(iii)(c)]. See Key Issue 29D for a discussion of ETIPs.

Crummey Irrevocable Life Insurance Trusts (“ILIT”) - To Allocate or Not To Allocate

Assuming the ILET is properly drafted,[55] the ILIT is one of the most popular and effective ways to leverage the GST exemption

Should transferors rely on the automatic exemption allocation method, affirmatively allocate on a timely Form 709, do a late allocation before death or let the executor handle it post-mortem on Form 706 or Schedule R?[56] OR TRUSTEE ON 1041.

There are several alternative ways to make term insurance-only ILITs GST tax exempt. Either allocate GST exemption (1) to the ILIT with timely Form 709s (2) allocate with a late Form 709 or (3) electing out and wait to allocate GST exemption in the year the transferor dies. [57]

Term Insurance:

1. The safest and simplest way to make ILIT transfers and term life insurance proceeds exempt from GST tax is to document the allocation (affirmatively or automatically in the case of a GST trust) on a timely Form 709 and Notice of Allocation. The price for this simplicity and security is use of more of the GST exemption. The other downside to periodically allocating GST exemption to life insurance premiums is that if the insured outlives the policy (as with the vast majority of term life insurance policies) the exemption allocated has been used unnecessarily. If the transferor has ample remaining GST and no GST transfers of assets with greater appreciation, this is the safest alternative.

2. Many use a wait and see approach, waiting until the transferor’s death to see if there is still insurance in effect. If there is, the executor can make an allocation[58] against the (a) ILIT’s value at the time of the allocation and (b) “dollar-for-dollar” against “all subsequent trust contributions”[59]

Marvin D. Hills warns that delaying allocation “is extremely effective if a client is cooperative enough to die relatively suddenly, (but) this plan can be a trap if the client develops health problems in the calendar year before death . . . that make him or her uninsurable or highly rated.”[60] The fair market value of the policy would go up and the increased value would consume far more of the exemption than periodic allocation.

IRC Sec. 2642(d) provides that where multiple contributions to a trust are made, the amount of the nontaxable portion is based upon relative values immediately before the transfers, indicating that later transfers (e.g., those made in a later year, although before the allocation is actually made on the late-filed return) are not considered. Hence, one-day late returns may be appropriate. ?????

For a late filed Form 709, the amount of GST exemption required to be allocated to protect the entire trust from the GST tax equals, as a general rule, the value of the property at the time of the allocation.

For insureds dying with term-life-insurance-only ILITs, a late filed Form 709 would only have to allocate GST to the value of the paid but unexpired premium on the date of the allocation / death. The policy proceeds would be exempt. For a “term life insurance policy that pays premiums monthly, the policy’s value (and, thus, the trust’s value) is arguably zero at the end of each month (when a premium becomes due again). As long as the trust’s FMV is zero as of the date of the gift(s) to the trust each year, one could wait (almost indefinitely) to make the allocation, because a timely allocation (even after the insured’s death) should still result in a fully exempt trust.”[61]

“This is because the timely allocation against the current-year premiums would equal 100% of the combination of (1) the policys value immediately before the gift (which is zero), plus (2) $10,000, the current-year gift(s). If multiple gifts are made to the trust during the year (for instance, monthly premium payments), a timely allocation against that first premium for the year would produce a zero inclusion ratio, as long as the policy’s FMV was zero immediately before that gift. Exempt status would then be maintained via the timely allocations to the other subsequent gifts to the trust during the year.”[62]

Not allocating against the premiums when they are contributed to the ILIT and waiting to allocate later against the diminished value of the ILIT maximizes leverage of the exemption(as long as it is allocated before the ILIT value goes up).

Delayed allocation requires only enough exemption to cover the ILIT’s current value, if any, plus the current premium.[63]

“As long as the FMV of the term insurance policy continues to be zero at the time of the first gift to the trust each year, the insured can wait indefinitely to allocate GST exemption to the trust, and simply let the executor file a timely allocation against the premiums paid during the year of death.”[64]

If this more risky wait-and-see approach is used, Hill recommends “maintaining good communication with the client . . . to ensure proper allocation of the GST exemption if the client develops health problems . . . if the insured develops health problems or an illness that causes the policy’s FMV to be greater than zero, he or she should timely file a gift return[65] and allocate exemption against that years premiums and begin filing gift returns annually thereafter.

Permanent Insurance Policies

Periodic Allocation: If allocation is made on a timely filed Form 709, the amount of GST exemption needed to exempt the ILIT will generally be a “policy’s cash value plus any unused (or remaining) premium already paid. For premiums paid later, the gift will equal the amount of the premium, unless a special valuation rule is prescribed. Where the premiums are paid by the trust and the grantor makes contributions to the trust, the gift will equal the fair market value of the property transferred to the trust by the grantor.”[66]

Wait-and-See Approach: For non-term insurance the potential benefit of late allocation of GST tax exemption after electing out of any automatic allocation, “lies in the fact that the value of the trust is generally lower after the premium has been paid, rather than on the date of trust funding; thus, a late allocation may use less GST tax exemption. The value of the trust decreases by the amount of the premium payment, while increasing only by the addition to the policy’s cash surrender value.” [67]

Hills explains the crucial difference between treatment of timely and late allocations. Regardless of when premiums are paid, IRC Sec. 2642(b)(1) treats exemptions as allocated to the trust as of the transfer date if (1) Form 709 is filed before the extended due date for that year or (2) there is an automatic allocation. IRC Sec. 2642(b)(c)

Significance

Expedited Due Date for Late Allocations: “In contrast, Regs. Sec. 26.2642-2(a)(2) provides that a donor must make any late allocation against current FMV by actually filing the return in the month the allocation is to be effective. For example, to allocate against the CSV (cash surrender value) as of July 1, 2004, the donor must file a (709) return in July 2004.”[68] Waiting to file Form 709s for late allocations until the following April 15 risks the insured’s dying during the interval and exposing the entire ILIT to GST tax.

For a late filed Form 709, “the amount of GST exemption required to be allocated to protect the entire trust from the GST tax equals, as a general rule, the value of the property at the time of the allocation. Although the regulations provide no specific guidance as to how a policy of insurance would be valued for purposes of a late allocation of GST exemption to it, presumably its value will be the same value as would apply for gift tax purposes if a gift of the policy were being made at that time.”[69]

Hill and Slade seem to agree (1)“that for a one-year term policy, the value at the time of the late allocation arguably should be nil” because the periodic premium is used up and the value of the policy and inclusion rate are zero and “if the insured dies during the term, a timely allocation of GST exemption should be made based upon the amount of the premium, because that timely allocation should exempt the entire policy proceeds from GST taxation.”[70]

12 Regs. § 26.2632-1(b)(2)(i).

13 Regs. § 26.2632-1(b)(2)(ii)(A)(1).

14 Regs. §26.2632-1(b)(2)(i).

15 § 2631(b); Regs. § 26.2632-1(b)(2)(ii)(A)(2).

16 Regs. § 26.2642-2(a)(2).

NY2:# 449357518

The indirect skip rules created another possible

problem for other ILITs. The IRS definition of a trust

to which the indirect skip rules apply is very broad.

See Treas. Reg. § 26.2632-1(b)(2). In many cases,

the settlor would not want GST exemption

automatically allocated to the trust. If the settlor is not

filing a gift tax return for gifts to the ILIT, or is not

making the proper election on the gift tax return to

elect out of the indirect skip rules, his or her GST

exemption may be being depleted unintentionally.

These trusts may be fully or partially exempt from

GST tax and the settlor and trustee, again, are

unaware of it. To properly administer the trust post-death, the

trustee will need to know when gifts were made, what

Crummey powers were granted, whether Crummey

powers lapsed in a taxable way, whether gift tax

returns were filed and what those returns reported.

Of course, record-keeping is important with any

irrevocable trust, but the nature of ILITs raises the

stakes: ILITs usually are funded with smaller annual

gifts over many years. The gifts are not always large

enough to require gift tax returns, and, over many

years, they cross over several different rules about

their tax treatment.

For the trustee, the consequences of lack of

information can be costly. If there is a taxable

termination in the trust (for example, the last child of

the settlor dies and the trust continues on for

grandchildren or terminates in their favor), the GST

tax is paid by the trustee out of the trust property.

IRC § 2603. A trustee who does not pay the tax,

operating on the incorrect assumption that the trust is

GST exempt, may face interest and penalties that

beneficiaries will assert should not be borne by the

trust. If the trust indeed has terminated, the trustee

will have to seek recovery of the tax from the

beneficiaries, an effort that is often not completely

successful. The fact that the beneficiaries are liable

as transferees and the IRS could go directly after

them does not help. The IRS will start with the trust

because it is the easiest target. And more to the

point, the trustee may have personal liability for the

GST tax under federal law if the trustee distributed

the trust assets when it should have known, with

reasonable inquiry, that a GST tax was due. See 31

U.S.C. § 3713; United States v. Ayer, 12 F.2d 194 (1st

Cir. 1926).

For a taxable distribution (for example, a discretionary

distribution by the trustee to a grandchild), the

beneficiary is liable for the GST tax unless the trust

agreement provides otherwise. IRC § 2603(a)(1). If

the trust is liable by its terms, the same issues

discussed in the preceding paragraph exist. If the

beneficiary is liable, the trustee has a duty to so

advise him or her. Failure to do so may beactionable. At the very least, it is very bad for

business.

It also is possible that the trustee of the ILIT may not

be aware of automatic allocations of GST exemption

that occurred during the settlor's life. In this situation,

the trustee could refuse to make distributions to skip

persons because of the perceived GST tax cost, or,

worse, make distributions and pay a GST tax that is

not due. If, in either case, it later is discovered that

the trust is GST exempt or is partially exempt, the

trustee will face potential liability. Ticking Time Bombs in Irrevocable Life Insurance Trusts

Written by:

Thomas W. Abendroth

tabendroth@

312.258.5501

Originally published in Trusts & Investments.

March 2008

SEe Portfolio 807-1st: Personal Life Insurance Trusts IV. Generation-Skipping Transfer Tax Concerns in Structuring a Life Insurance Trust,Estates, Gifts and Trusts © 1995-2006 Tax Management® Inc., a BNA Company

A. Application of the Generation-Skipping Transfer Tax and Effective Date Rules

B. Use of the Nontaxable Gift Exclusion

1. Scope of Nontaxable Gift Exclusion

2. Application of Nontaxable Gift Exclusion to Traditional Life Insurance Trusts

3. Crummey Powers of Withdrawal and the Nontaxable Gift Exclusion

4. Using Cascading Crummey Powers to Avoid GST Tax

C. Use of the GST Exemption

1. How to Allocate GST Exemption

2. Amount and Timing of GST Exemption

a. Inter Vivos Revocable Trust

b. Inter Vivos Irrevocable Trust

c. Testamentary Trust

D. Shift of Transferor When Beneficiaries Hold Crummey Powers

E. Special Generation-Skipping Transfer Tax Concerns Where Irrevocable Insurance Trust Terminates in Favor of Children

Pursuant to Regulations Governing Practice Before the Internal Revenue Service (Circular 230) this communication is is not intended or written to be used as legal or accounting advice, and it cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

9 See I.R.C. (sec) 2632(a).

10 See I.R.C. (sec) 2652(a)(1)(A).

11 See I.R.C. (sec) 2041.

12 See I.R.C. (sec) 2642(f).

13 See I.R.C. (sec) 2041.

14 See I.R.C. (sec) 2041(b)(1).

15 Id

16 See I.R.C. (sec) 2041.

17 See I.R.C. (sec) 2041 (b)( 1).

18 See I.R.C. (sec) 2041(b)(1)(A).

19 See Treas. Reg. (sec) 20.2041-1(cX2).

20 Id.

21 Id.

22 See Treas. Reg. 20.2041-1(b).

23 See id.

24 See Priv. Ltr. Rul. 89-16-032 (Jan.19,1989).

25 See I.R.C. (sec) 2041.

TABLE OF AUTHORITIES

Statutes:

Internal Revenue Code,

U.S.C. Title 26, Subtitle B, Chapter 13:

• § 2503(c) Trusts for benefit of minors

2611. Generation-skipping transfer defined

• § 2612. Taxable termination; taxable distribution; direct skip

• § 2613. Skip person and non-skip person defined

• § 2621. Taxable amount in case of taxable distribution

• § 2622. Taxable amount in case of taxable termination

• § 2623. Taxable amount in case of direct skip

• § 2624. Valuation

• § 2631. GST exemption

• § 2632. Special rules for allocation of GST exemption

• § 2641. Applicable rate

• § 2642. Inclusion ratio

• § 2651. Generation assignment

• § 2652. Other definitions

• § 2653. Taxation of multiple skips

• § 2654. Special rules

• § 2661. Administration

• § 2662. Return requirements

• § 2663. Regulations

• § 2664. Termination

Treasury Regulations:

Title 26, Chapter I, Part 26--Generation-Skipping Transfer Tax Regulations Under The Tax Reform Act Of 1986

[pic]

26.2600-1 Table of contents.

26.2601-1 Effective dates.

26.2611-1 Generation-skipping transfer defined.

26.2612-1 Definitions.

26.2613-1 Skip person.

26.2632-1 Allocation of GST exemption.

26.2641-1 Applicable rate of tax.

26.2642-1 Inclusion ratio.

26.2642-2 Valuation.

26.2642-3 Special rule for charitable lead annuity trusts.

26.2642-4 Redetermination of applicable fraction.

26.2642-5 Finality of inclusion ratio.

26.2642-6 Qualified severance.

26.2651-1 Generation assignment.

26.2651-2 Individual assigned to more than 1 generation.

26.2651-3 Effective dates.

26.2652-1 Transferor defined; other definitions.

26.2652-2 Special election for qualified terminable interest property.

26.2653-1 Taxation of multiple skips.

26.2654-1 Certain trusts treated as separate trusts.

26.2662-1 Generation-skipping transfer tax return requirements.

26.2663-1 Recapture tax under section 2032A.

26.2663-2 Application of chapter 13 to transfers by nonresidents not citizens of the United States.

26.6081-1T Automatic extension of time for filing generation-skipping transfer tax returns (temporary).

Treatises and Articles:

03 July 2009

Final regulations under section 2642(g) regarding extensions of time to make allocations of the generation-skipping transfer tax exemption.

Articles:

Blattmachr & Zeydel, “Adventures in Allocating GST Exemption in Different Scenarios,” 35 Estate Planning 3 (Apr. 2008) “analyzes the various methods to create GST exempt and non-exempt trusts, as well as the effect on GST exempt status of consolidating trusts for administrative purposes.”

Catherine Grevers Schmidt, “ESTATE PLANNING FOR THE SURVIVING SPOUSE,” 35 Estate Planning 3 (Dec. 2008)

Daniel S. Rubin, UNDERSTANDING THE GENERATION-SKIPPING TRANSFER TAX, 348 PLI/Est 545, Practising Law Institute, 2008.

Qualified Severances:

GST Tax Update: Income & Transfer Tax Roundtable, Julie K. Kwon, ABA Real Property, Trust & Estate Law, 19th Ann. Spg. Syposia, May 2, 2008.

PPC Key Issue 32D: Severing a Trust.

RIA 527

CAROL A. HARRINGTON, LLOYD L. PLAINE & HOWARD M. ZARITSKY, GST TAX: ANALYSIS WITH

FORMS (2d ed. 2007).

No later than before the end of 2010, it is advisable to divide any trust that is only partially exempt from GST tax into separate trusts; one entirely exempt from the tax and one entirely subject to the GST tax. This is called a "qualified severance." It is advisable to sever trusts in this manner so that the nonexempt trust can be used to benefit older generation beneficiaries and exempt trusts can be preserved for younger generation beneficiaries. After EGTRRA expires, it is not clear whether such severances will continue to be allowed. (25)

(22) The IRS has discretion to allow retroactive allocations. IRC [section] 2642(g)(1)(B). See Treas. Reg. [section] 301.9100-3 for procedures for relief. The usual grounds for relief is the failure of the return preparer to allocate exemption or a lawyer's failure to properly advise the client of the need to allocate GST exemption.

(23) IRC [section] 2642(f) provides that GST tax exemption cannot be allocated to a trust during the period of time that the assets are subject to being included in the donor's gross estate for estate tax purposes. A GRAT is included in the grantor's estate if the grantor dies before the expiration of the term of the grantor's annuity. Thus, the grantor's GST tax exemption cannot be allocated to the GRAT until the annuity expires.

(24) IRC [section] 2652(a)(3).

Any gift to a generation skipping trust will be automatically

allocated to the transferor’s generation skipping tax exemption unless you

elect otherwise. The question of what is a generation skipping trust is very

difficult but the typical irrevocable life insurance trust is a generation skipping

trust unless it provides that on death of a beneficiary, the property in the trust

will be included in the beneficiary’s estate (not a typical provision). The [Page 3

client may not want to allocate GST exemption to the trust because of the

unlikelihood that a child will die before the parent/transferor. If nothing is

done, the exemption will be “wasted” on this trust. The new regulations allow

considerable flexibility to elect out of the allocation of GST to the trust and

professional advisors should consider whether to file a gift tax return merely

to elect out of allocation of the exemption. If the client is unlikely to need to

elect out, or if the client does not desire to elect out, it still may be a good idea

to file the return in order to track the remaining exemption. If you don’t, on

death it may be difficult to determine what GST exemption is left and how

much is available to be allocated to transfers at death. If exemption is

specifically allocated to the trust, the preparer should consider using a formula

allocation. The new regulations also do not directly discuss late allocation of

the exemption but through a two step process, a late allocation can be made

that can reduce the amount of exemption used by the taxpayer. This

discussion is beyond the scope of this outline. BUILDING FLEXIBILITY INTO THE

TYPICAL IRREVOCABLE LIFE

INSURANCE TRUST

Presented to the Kentucky Society of Certified Public Accountants, 48th Annual

Kentucky Institute on Federal Taxation, November 18, 2005, Louisville, KY.

By: Gary A. Zwick, Esq. (CPA)

Partner & Head of the Tax & Wealth Management Section

Walter & Haverfield LLP

Cleveland, Ohio

216-928-2902

gzwick@



What are the special requirements of a generation-skipping trust?

Even if the trust is not intended to be a generation skipping trust, it is possible that an unfortunate series of deaths

may cause the trust to become a generation skipping trust.  As an example, if a child dies and a grandchild becomes

the beneficiary of the deceased child’s share, a generation skipping tax would be due on payments to the grandchild.  

To prevent that, a portion of the insured’s Generation Skipping Tax Exemption is allocated to the ILIT by filing a Form

709 Federal Gift and Generation Skipping Transfer Tax Return with the IRS.  If the non-gifting spouse has agreed to

gift split, that spouse must allocate that spouse’s GST to the ILIT.  In either case, the allocation is in an amount equal

to the premiums.  The child may also be given a general power of appointment and GST Exemption does not need to

be allocated.

▪ GSTT and irrevocable life insurance trusts (ILITs) (cont’d)

▪ Costs to using the exemption to shelter premium payments

▪ The GSTT exemption is not available to avoid the tax on other transfers to skip persons

▪ The client will have to file annual tax returns claiming the exemption

▪ Opportunity cost. Exemption could be wasted if allocated to ILIT and ILIT later turns out to not be generation-skipping

▪

▪ Downsides to qualifying for the GSTT annual exclusion

▪ If the beneficiary dies before the client-grantor, trust includable in beneficiary’s estate

▪ Crummey power techniques, such as the hanging power, will not qualify for the annual exclusion

▪ Exclusion requires dispositive rigidity (separate trusts required)

▪ Trust cannot provide financial security for intervening skipped generation

Life Insurance and the

Generation-Skipping Transfer Tax

Appendix C

Tools & Techniques of Life

Insurance Planning

NuCollege/life/Appendix C.ppt

GST Exempt or Not

 

Should the trust be GST exempt or not? Since only about 2% of term insurance policies ever pay-off, evaluate whether your GST exemption should be wasted on an ILIT holding only term coverage. Also, even if your ILIT holds permanent insurance that is almost assuredly going to be maintained in force for the duration, you may have more important uses of your GST exemption. Plan accordingly. So even if making the ILIT GST exempt is reasonable, if you have better uses of your exemption, have the trust drafted in a manner that avoids GST issues. For example, the ILIT could be drafted in a manner that causes it to be included in your children's estate to avoid the GST tax. If it is intended that you will allocate, on your gift tax return, sufficient generation skipping transfer ("GST") tax exemption to the trust to keep it free of GST Tax issues (to create a zero inclusion ratio) be certain your accountant addresses this on a gift tax return.  See "Potpourri".

Shenkman, The Practical Planner: "Insurance Trusts (ILIT) Not So Simple"

February 2, 2009



Gallo, The Use Of Life Insurance In Estate Planning: A Guide To Planning And Drafting--Part II, Real Property, Probate and Trust Journal, Spring 1999,

The article details the ILIT problems with powers of appointment and the income, estate, gift, and generation-skipping tax consequences to the holder of the Crummey withdrawal powers.

APPENDIX A

List of Information Needed To Analyze Allocation of GST Exemption on Form 709

Documents:

1. All prior form 709s and 706 filed by the executor and attachments.

2. Trust instruments and any amendments and supplements

3. Any formal estate plan documentation

Facts Needed:

1. Amount of GST exemption available.

Facts To Ascertain From Trust Instrument:

-----------------------

[1] The same question arises with Form 706 but post-mortem allocations are outside the scope of this paper. See RIA Portfolio 850, G. Automatic Allocation of GST Exemption At Death and the attached Index of Sources which includes sources on drafting, planning and post-mortem allocations. Also excluded from this article are pre-2001 transfers. See _____

[2]

[3] It is presumed that the reader is familiar with those three sources and every effort has been made not to unnecessarily duplicate their content in this article without sacrificing comprehensibility. Significant rules from these sources not having to do with allocation of lifetime transfers are omitted from this article for the sake of brevity.

[4] Beth Shapiro Kaufman, Estate Tax Legislation In 2009: Avoiding The Train Wreck, Estate Planning Magazine, July 2009, describes, “What is in play” and suggests that the most likely consensus is to maintain the status quo of the GST exemption and tax rate at the 2009 level. “There is also a reasonable possibility that Congress will enact portability and restore parity between the gift tax and estate tax exemptions.”

[5] Section 501(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (June 7, 2001) (“EGTRRA”), the generation-skipping transfer (“GST”) tax is repealed effective January 1, 2010; Section 901(a) of EGTRRA, in order to comply with the Congressional Budget Act, provides that all provisions of EGTRRA (including the “repeal” of the GST tax) will “sunset” on December 31, 2010 and the provisions of EGTRRA will then be treated “...as if the provisions and amendments...had never been enacted.”

[6] PPC Key Issue 29A, Thompson Reuters/RIA.

[7] GST glossaries are in Allocating The Generation-Skipping Transfer Tax Exemption - All You Need To Know To Fill Out The Forms, Mickey R. Davis, Thirty-Fifth Annual Southern Federal Tax Institute, 2000, pp. S- , hereafter “Davis 2000” and Reg. Sec. 26.6212-.1

[8] IRC 2__________; The lifetime gift tax exemption is still only $1,000,000 which complicates planning but hopefully the exemptions will be reconciled.

[9] PPC Key Issue 29D: Timely Allocation of the Lifetime Exemption.

[10] PPC Key Issue 29D: Timely Allocation of the Lifetime Exemption.

[11] PPC Key Issue 31A:

[12] PPC or RIA, do word search.

[13] PPC Key Issue 29D: Timely Allocation of the Lifetime Exemption and PPC’s Guide to Practical Estate Planning.

[14] RIA 1664 Election Not To Allocate GST Tax Exemption To a Direct or Indirect Skip.

[15] Practioners’ Planning Co., Thompson Reuters

[16] Thomas L. Stover, Advising Gst Trust Beneficiaries, Boulder County Estate Planning Council, February 17, 2009 also has a list of “Questions You Should Always Ask the Client – and Why” (p. 31) to which I have added in Appendix __.



[17] Blattmachr & Zeydel, “Adventures in Allocating GST Exemption in Different Scenarios,” 35 Estate Planning 3, 3-4 (Apr. 2008).

[18] Julie K. Kwon, GST Tax Update: Income & Transfer Tax Roundtable, ABA Real Property, Trust Sect., 9/16/05, p. 1 (“Kwon ’05” hereafter”).

[19] The inclusion ratio is one minus the “applicable fraction” rounded to the nearest one-thousandth (.001). IRC 2642(a)(1), Reg. 26.2642-1(a). The numerator of the “applicable fraction.” is the amount of the GST exemption allocated to the trust. The denominator is the value of the property transferred, reduced by the sum of (1) any federal estate tax or state death tax recovered from the trust attributable to the transfer, and (2) the gift or estate tax charitable deduction, if any, allowed for the property. IRC § 2642(a)(2), Reg. Section 26.2642-2(a)(1).

[20] See Reg. Sec. 26.2642-4, PPC Key Issue 29C and PPC Worksheet W202 for recalculating the inclusion ratio.

[21] Daniel S. Rubin, Understanding The Generation-Skipping Transfer Tax, 348 PLI/Est 545, 576, Practising Law Institute, 2008.

[22] Zeyer, supra, at p 13.

[23] RIA 1664, supra.

[24] Rubin, supra at 575.

[25] Rubin, supra at 576.

[26] Rubin, supra at 576.

[27] Distinguish lifetime exemptions from annual exclusions.

[28] “In the case of a direct skip which is a nontaxable gift, the inclusion ratio of zero,” resulting in no GST tax. I.R.C. § 2642(c)(1). See PPC Key Issue 1M: GST Tax Reporting Issues.

[29] Mickey R. Davis, Allocating The Generation-Skipping Transfer Tax Exemption All You Need To Know To Fill Out The Forms, supra, Thirty-Fifth Annual Southern Federal Tax Institute, 2000, pp. S-7,8.

[30] TUITION

[31] PPC Key Issue 24E.

[32] GST trusts provided that the transfer is subject to gift tax and does not qualify as a direct skip.

[33] Rubin, supra at 578.

[34] E.g., 706, 1041, Schedule R.

[35] Ronni G. Davidowitz, 348 PLI/Est 597, , 626Understanding Estate, Personal, Gift & Fiduciary Income Tax Returns 2008.

[36] Id.

[37] Davidowitz, 348 PLI/Est 597, 625-26.

[38] RIA 1664 Election Not To Allocate The Generation-Skipping Transfer (GST) Tax Exemption To A Direct Or Indirect Skip.

Title Case

[39] Id.

[40] Id.

[41] See checklist supra, IRC Sec. 2632(b), Reg. 26.2632-1(b)(4)(i) and the Form 709 instructions prescribe the contents of the Notice of Allocation and Kwan 2005, supra, p.3.

[42] PPC Key Issue - . / ‚ ÷òêòâÚÒâÚêÎÇÀǹǦ‘|g|g`THh›xCJOJQJaJhÙCJOJQJ HYPERLINK "" 29D, Election E303 and Example 30B-2.

[43] Rubin, supra at 581

[44] Davidowitz, 348 PLI/Est 597, 626..

[45] Rubin, supra at 581-82.

[46] Id. p.2.

[47] Rubin, supra at 584.

[48] PPC Key Issue 29E.

[49] E.g., PLR 200927015, see BNA Porfolio Secs. 2642, 850 T.M., VIII.E., pp. A-88-91.

[50] Proposed in 2008. Reg. §301.9100-3 and Notice 2001-50, 2001-2 C.B. 189 will be obsolete.

[51] BNA Portfolio 850, E. 9100 Relief details what is prejudice and what is not good faith, e.g., informed choice not to make election, hindsight and changed circumstances, lower tax and limitations expiration.

[52] See PPC Example 29E-2: Late allocation of the GST exemption.”

[53] Id.

[54] PPC Key Issue 32A and PPC Sample Election E305. The retroactive allocation provisions are currently scheduled to expire at the end of 2010.

[55] See Linas Sudzius, Take Advantage Of The GST Exemption Today, 4/6/2009 

§8.4 Benefits of ILIT •, 91 which contains a list of potential defects to look for in the ILIT instrument. Also see What’s In Your Trust Instrument?

[56] See Appendix B for information and documents needed to analyze allocation with ILITs.

[57] Marvin D. Hills, Wait and See GST Tax Planning, 2006,

[58] On Form 706 or Schedule R.

[59] Presumably unused or subsequent premium payments. See Hills, supra.

[60] Id. pp. 1, 3.

[61] Hills, supra p. 2.

[62] Id.

[63] Hills, supra, Eg., 1.

[64] Hills, supra, pp. 3-4.

[65] Ideally the same month and elect the first-day-of-the-month valuation option although some commentator’s believe the death element is not actually required. Slade, supra, at ___

[66] Slade, supra at

[67] Slade, Irrevocable Life Insurance Trusts: Planning Opportunities And Considerations After The Trust Is Executed, 2003.

rppt/meetings_cle/spring2003/pt/planninginsurance/slade.pdf

[68] Hills, supra, p.2.

[69] Slade, supra at

[70] Slade, supra at p.

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