FOR LIVE PROGRAM ONLY Mastering IRC 2632 GST Exemption Allocation Rules: Identifying GST Trusts and Indirect Skips THURSDAY, JUNE 22, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. 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.
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Mastering IRC 2632 GST Exemption Allocation Rules June 22, 2017 Diana S.C. Zeydel, Shareholder Greenberg Traurig, Miami zeydeld@gtlaw.com Nathan R. Brown Proskauer Rose, Boca Raton, Fla. nbrown@proskauer.com
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Mastering the IRC Section 2632 GST Exemption Allocation Rules Diana S.C. Zeydel Greenberg Traurig, P.A. Miami, Florida Nathan R. Brown Proskauer Rose LLP Boca Raton, Florida G R E E N B E R G T R A U R I G, L L P A T T O R N E Y S A T L A W W W W. G T L A W. C O M 2013 Greenberg Traurig, LLP. All rights reserved.
Introduction > Allocating generation-skipping transfer ( GST ) tax exemption can be a goldmine and a mine field for estate planners and accountants. > Early allocation of GST exemption to a trust with appreciating assets can avoid GST tax not only on the value of the property contributed, but on the entire appreciated value. > A failed allocation of GST exemption could subject substantial property to an onerous tax that effective allocation might have avoided. 6
Introduction (continued) > The Code provides multiple sets of so-called deemed or automatic allocation rules. The rules are imperfect and not well understood. Missed allocations and unwanted allocations can occur. 7
5 Ways GST Exemption May Be Allocated under Section 2632 > Affirmative Allocation Timely or Late > Deemed Allocation to Direct Skips > Deemed Allocation to Indirect Skips > Retroactive Allocation > Automatic Allocation at Death 8
AFFIRMATIVE ALLOCATIONS Sections 2631 and 2632 9
Affirmative Allocations > When Do I Have to Make the Allocation? Section 2632 provides that an affirmative allocation of GST exemption may be made at any time before the date prescribed for filing the estate tax return, including extensions. > How Much GST Exemption Do I Need to Allocate? Timely Allocation Allocate GST exemption based upon the value of the property on the date of transfer. Late Allocation Allocate GST exemption based upon the value of the property on the date of allocation (subject to the first of the month election). 10
Example > John Doe creates The Doe Family 2016 Trust on December 1, 2016 and transfers $100,000 to the trust on December 15, 2016. > The trust does not contain powers of withdrawal. > The trust is a discretionary sprinkle trust for the benefit of Jane Doe and descendants that continues upon Jane Doe s death in further separate trusts for John Doe s descendants. > John Doe desires to allocate sufficient GST exemption to the trust so that the trust has an inclusion ratio of zero. 11
Reporting the Transfer on Form 709 > The transfer to the trust is an indirect skip that must be reported on Schedule A, Part 3, Item 1. > The trust is a GST Trust not within any of the exceptions. > There are two approaches to allocating GST exemption: Elect into deemed allocation to ensure an effective allocation. Elect out of deemed allocation, and affirmatively allocate GST exemption to the trust on a Notice of Allocation attached as an Exhibit to Schedule D, Part 2, Line 6. It appears that the IRS finds this approach confusing. 12
Sample Form 709 13
Sample Statement for Indirect Skip Trust 14
Sample Election In Statement TAXPAYER: JOHN DOE TAXPAYER ID: XXX-XX-XXXX Attachment to and Made a Part of United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709 Calendar Year 2016 SCHEDULE A, Part 3, Item 1 GST TRUST ELECTION STATEMENT Name of Trust: EIN of Trust: Name(s) of Trustee(s): The Doe Family 2016 Trust XX-XXXXXXX Jane Doe Date of Trust: December 1, 2011 Date of Transfer of Assets: December 15, 2011 Inclusion Ratio: Zero (0) Election: The taxpayer hereby elects that The Doe Family 2016 Trust shall be treated as a GST trust and that the automatic allocation rules will apply to any transfer by the taxpayer to The Doe Family 2016 Trust in 2016 and to any and all future transfers that the taxpayer may make to The Doe Family 2016 Trust so that the taxpayer s unused GST exemption is allocated to the extent necessary to cause The Doe Family 2016 Trust to have an inclusion ratio of zero or, if that is not possible, the smallest possible inclusion ratio. 15
How Do I Make an Affirmative Allocation? > An affirmative allocation to a lifetime transfer is made by filing a Notice of Allocation. > The Notice of Allocation must be created by the return preparer, and must fulfill specific requirements set forth in the regulations and instructions to the return. 16
Notice of Allocation Requirements > Clearly identify the trust and trust s EIN if known. > If it is a late allocation, state the year the transfer was reported. > State value of the assets at the effective date of allocation. > State the amount of GST exemption allocated OR USE A FORMULA. > State the inclusion ratio of the trust. 17
Sample Form 709 18
Sample Notice of Allocation TAXPAYER: JOHN DOE TAXPAYER ID: XXX-XX-XXXX Attachment to and Made a Part of United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709 Calendar Year 2016 SCHEDULE D, Part 2, Line 6 NOTICE OF ALLOCATION OF GST EXEMPTION SCHEDULE A, Part 3, Item 1 Name of Trust: The Doe Family 2016 Trust EIN of Trust: XX-XXXXXXX Name(s) of Trustee(s): Jane Doe Date of Trust: December 1, 2016 Date of Transfer of Assets: December 15, 2016 Value of Assets on Date of Transfer $100,000.00 Amount of GST Exemption Allocated to the Transfer: The taxpayer hereby allocates to the assets transferred to The Doe Family 2016 Trust so much of the taxpayer s unused GST exemption as shall be necessary so that The Doe Family 2016 Trust shall have an inclusion ratio of zero for GST tax purposes or, if that is not possible, the taxpayer s entire unused GST exemption. Inclusion Ratio: Zero (0) 19
When Does an Affirmative Allocation Take Effect? > Timely Allocation An allocation of GST exemption on a timely filed Form 709 takes effect on the date of transfer. A timely allocation may be amended by a subsequent return so long as the subsequent return is also timely. > Late Allocation An allocation of GST exemption on a Form 709 that is not timely filed takes effect on the date of filing, which is the date the Form 709 is postmarked to the IRS address directed in forms or other guidance. 20
Allocation Deemed to Precede Taxable Event > Any allocation of GST exemption is deemed to precede taxable events occurring on that date. > Thus, a late allocation of GST exemption can be made to shelter a taxable distribution or taxable termination if it is accomplished on the date the event occurs. 21
Example > Trustee contemplates making a $200,000 distribution to a skip person from a non-exempt trust owning assets valued at $1,000,000. > Without any action on behalf of the transferor, the taxable distribution would result is a GST tax of $80,000 ($200,000 x 40%). > The GST tax can be avoided if the transferor files a Form 709 on (or before) the date the distribution is made and allocates enough GST exemption to shelter the entire trust from GST tax. 22
Late Allocations > A late allocation may be made only if GST exemption is not automatically allocated to the transfer or the transferor timely elects out of automatic allocation. > An intentional late allocation may be desirable if the assets in the trust depreciate between the time of the transfer and the time for filing the Form 709 reporting the transfer. 23
Example > Assume that Bill transfers stock to a GST trust on August 1, 2016 when the stock had a value of $2,000,000. > On April 14, 2017, the value of the stock has declined to $1,000,000. > Because the trust is a GST trust, $2,000,000 of Bill s GST exemption will be automatically allocated to the trust on the due date of his Form 709 for the calendar year 2016. > If Bill files a timely Form 709 electing out of automatic allocation on April 15, 2017, Bill may make a late allocation on a subsequent Form 709 that is effective on the date he files. > Bill saves $1,000,000 of GST exemption! 24
First-of-the-Month Rule for Late Allocations > The taxpayer may elect to value assets as of the first day of the month when making a late allocation. > Not for a life insurance trust if the insured has died. > Allocation takes effect on the date of filing, not the first of the month. > In the prior example, Bill could elect April 1, 2016 as his valuation date for the stock. 25
Example > In 2017, Jill wishes to make an allocation of GST exemption to property Jill transferred to a trust in 2013. > Jill proposes to make a late allocation on her timely filed Form 709 for 2017. > The trust assets have a value of $1,000,000 on April 15, 2017, but have a value of $900,000 on April 1, 2017. > If Jill elects the first of the month rule, she will only need to allocate $900,000 of GST exemption to the trust rather than $1,000,000. 26
Sample Late Allocation and First of the Month Election Attachment to and Made a Part of United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709 Calendar Year 2017 Name of Trust: The Doe Family 2013 Trust EIN of Trust: XX-XXXXXXX Name(s) of Trustee(s): Jill Doe Date of Trust: December 1, 2013 Year Transfer of Assets Reported: 2013 Election to Value Assets on First Day of the Month SCHEDULE D, Part 2, Line 6 NOTICE OF ALLOCATION OF GST EXEMPTION Election: For purposes of the late allocation of GST exemption hereby made to The Doe Family 2013 Trust, the taxpayer elects under the Treasury Regulations to value the assets of The Doe Family 2013 Trust as of the first day of the month on which this return, Form 709 for the calendar year 2017, is filed Applicable Valuation Date: April 1, 2017 Fair Market Value of Trust Assets of The Doe Family 2013 Trust on the Valuation Date: $900,000.00 Amount of GST Exemption Allocated to the Transfer: The taxpayer hereby makes a late allocation of the taxpayer s unused GST exemption to The Doe Family 2013 Trust as of the date of filing of this return, Form 709 for the calendar year 2017, and allocates to The Doe Family 2013 Trust so much of the taxpayer s unused GST exemption remaining as shall be necessary so that The Doe Family 2013 Trust shall have an inclusion ratio of zero for GST purposes or, if that is not possible, the taxpayer s entire unused GST exemption. Inclusion Ratio: Zero (0) 27
Term Life Insurance > Some may consider making late allocations of GST exemption to life insurance trusts owning term life insurance policies. > The mere passage of time depletes the value of pure term life insurance. > However, most term policies never mature. > Therefore, allocating GST exemption to a term policy is rarely the right approach. 28
Example > On May 1, 2016, Fred contributes $100,000 to a trust to pay the premium due on a term life insurance policy owned by the trust. > Fred has previously elected out of the automatic allocation rules. > On April 15, 2017 (the unextended due date for the Form 709), Fred could consider whether to make a timely or late allocation of his GST exemption to the trust. > Timely Allocation Fred would need to allocation $100,000 of GST exemption. > Late Allocation Fred would need to allocate GST exemption equal to the value of the term policy on the date the Form 709 is filed. Assuming Fred remains in good health, the value of the term policy should be much less than $100,000 near the end of the policy year. 29
What Else Do I Need to Know About Affirmative Allocations? > IRREVOCABLE once made. > May be superseded by prior automatic allocations, including in the same year. > Effect of estate tax inclusion period ( ETIP ). 30
DEEMED ALLOCATIONS TO DIRECT SKIPS Section 2632(b) 32
Why and When Does a Deemed Allocation Occur? > Purpose is to avoid inadvertent GST tax when it is anticipated that the taxpayer would have wished to allocate GST exemption. > A taxpayer s unused GST exemption will be automatically allocated to any direct skip transfer (including direct skip transfers in trust), unless the taxpayer elects out. 33
What is a Direct Skip? > A direct skip is any transfer to a skip person. > A skip person is Any individual assigned to a generation two or more generations below the transferor. Any individual (who is not related to the transferor) more than 37 ½ years younger than the transferor. Any trust if all interests in the trust are held by skip persons and at no time after the transfer may a distribution be made from the trust to a non-skip person. 34
How Much GST Exemption is Allocated? > The taxpayer s unused GST exemption is allocated to the property transferred in the direct skip to the extent necessary to result in an inclusion ratio of zero (if possible). > If taxpayer s unused GST exemption is insufficient, the property (or trust) will have a mixed inclusion ratio. 35
Ordering Rule > A taxpayer s unused GST exemption available for automatic allocations to direct skips is equal to the portion of the taxpayer s GST exemption not previously affirmatively allocated by the taxpayer or deemed allocated to prior direct skips or indirect skips. > Deemed allocations to direct skips take effect in chronological order. > Deemed allocations to direct skips precede deemed allocations to indirect skips and affirmative allocations of GST exemption. 36
Example > Mary has $5,000,000 of GST exemption remaining. > Mary gives $214,000 to grandchild A on January 1 and $5,000,000 to a direct skip trust on June 1, 2017. > Because both transfers are direct skips, Mary s GST exemption is allocated chronologically. > As a result, only $4,800,000 of GST exemption is allocated to the trust. Note $14,0000 of the gift to grandchild A is a nontaxable transfer not requiring any allocation. 37
Example > Mary has $5,000,000 of GST exemption. > Mary gives $214,000 to grandchild A on January 1, 2017, $4,800,000 to a GST trust on May 1, 2017 and $214,000 to grandchild B on June 1, 2017. > Is the GST trust exempt? NO! > Although the transfer to the GST trust occurred prior in time to the gift to grandchild B, the automatic allocation rules will first allocate Mary s unused GST exemption to all directs skips in same year. > Accordingly, only $4,600,000 of GST exemption will be allocated to the GST trust. 38
Electing Out of the Automatic Allocation Rules > If you do not want automatic allocation to a direct skip, you must check the box on Schedule A, Part 2, Column C on a timely filed Form 709. > Is that enough? No. > You must attach a statement describing the transaction and the extent to which automatic allocation is not to apply. > Or you can pay the tax Not clear what happens if you make a partial payment. 39
Form 709 Schedule A, Part 2, Column C 40
Sample Election Out of Deemed Allocation to a Direct Skip Trust TAXPAYER: JOHN DOE TAXPAYER ID: XXX-XX-XXXX Attachment to and Made a Part of United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709 Calendar Year 2016 SCHEDULE A, Part 2, Item 1 ELECTION OUT STATEMENT Name of Trust: EIN of Trust: Name(s) of Trustee(s): The Doe Family 2016 Trust XX-XXXXXXX Jane Doe Date of Trust: December 1, 2016 Date of Transfer of Assets: December 15, 2016 Value of Assets on Date of Transfer:: $ 100,000.00 Inclusion Ratio: One (1) Election: The Doe Family 2016 Trust is a direct skip trust. The taxpayer hereby elects that the deemed allocation rules under Section 2632(b) of the Code will not apply to any of the property transferred by the taxpayer to The Doe Family 2016 Trust in the calendar year 2016. 41
No Deemed Allocation to Nontaxable Gifts > Automatic allocation does not apply to that portion of the transfer that is a nontaxable gift. > Nontaxable gifts include gifts qualifying for the gift tax annual exclusion under section 2503(b) and gifts for medical or educational expenses under section 2503(e). > Transfers in trust will not qualify unless the trust is a section 2642(c) trust. > Crummey powers are not enough. 42
Example > Nate transfers $100,000 to his granddaughter in 2017 and has made no other transfers to his granddaughter during the calendar year. > The first $14,000 of the transfer qualifies for the gift tax annual exclusion and, thus, is a nontaxable gift. > As a result, the portion of the transfer that is a nontaxable gift has an inclusion ratio of zero and only $86,000 of Nate s GST exemption will be allocated to the transfer. 43
When Does a Deemed Allocation Take Effect? > A deemed allocation of GST exemption to a direct skip is effective as of the date of the transfer and becomes irrevocable after the due date for the Form 709 for the year of the transfer. > Subject to the ETIP rules. 44
DEEMED ALLOCATIONS TO INDIRECT SKIPS Section 2632(c) 45
When Does a Deemed Allocation Occur? > Effective for transfers AFTER December 31, 2000. > Code defines a new type of transfer called an indirect skip. > An indirect skip is a transfer to a GST trust (other than a direct skip trust). > A taxpayer s unused GST exemption will be automatically allocated to any transfer to a GST trust. 46
How Much GST Exemption is Allocated? > The taxpayer s unused GST exemption is allocated to the GST trust to the extent necessary to make the inclusion ratio of the property zero. > The taxpayer s unused GST exemption is equal to that portion of the GST exemption Not previously affirmatively allocated by the transferor, Not deemed allocated to a direct skip occurring before or during the calendar year in which the indirect skip occurs or Not deemed allocated to prior indirect skips 47
Example > Zach has $5,000,000 of unused GST exemption. He transfers $514,000 to grandchild A on May 1, 2016, $4,500,000 to a GST trust on July 1, 2016 and $514,000 to grandchild B on October 1, 2016. > Under sections 2632(b) and (c), his unused GST exemption would be automatically allocated first to the transfer to grandchild A, second to the transfer to grandchild B and last to the transfer to the GST trust, thus producing a fractional inclusion ratio of 1/9 for the trust. > If Zach wanted GST exemption to be allocated only to the trust, he need timely to elect out of automatic allocation to the two outright gifts to his grandchildren. 48
When Does the Deemed Allocation Take Effect? > A deemed allocation of GST exemption to a GST trust is effective as of the date of the transfer and becomes irrevocable after the due date for the Form 709 for the year of the transfer. > Subject to the ETIP rules. 49
GST Trusts > Very broadly defined. > A GST trust is any trust that could have a GST with respect to the transferor. > Six exceptions. 50
Exceptions to GST Trusts > Different names are used for the exemptions to a GST trust, but here are the six categories: Age 46 trust Ten year age difference trust Partial estate tax inclusion trust Non-skip person estate tax inclusion trust CLAT, CRAT or CRUT CLUT 51
First Exception Age 46 Trust > The trust provides that more than 25% of the trust corpus must be distributed to or may be withdrawn by one or more individuals who are non-skip persons Before the date the individual attains the age of 46; On or before one or more dates specified in the trust that will occur before the date that such individual attains the age of 46; or Upon the occurrence of an event that, in accordance with regulations prescribed by the Treasury Secretary, may reasonably be expected to occur before the date that such individual attains the age of 46. 52
Examples > John transfers $1,000,000 to a trust for the benefit of his descendants, with income payable to John s son, Michael, during his life. Upon Michael s death, the trust terminates and all the trust assets will be distributed outright to Michael s descendants. Exception 1 does not apply. > Same as above, except that when Michael attains age 40, he has the right to withdraw 1/3 of the trust corpus. Exception 1 applies. > John transfers $1,000,000 to a trust for the benefit of his wife, Emily, and his descendants. Upon Emily s death, the trust is divided into shares, per stirpes, for John s descendants and held in further trust until each descendant for whom a share is set apart reaches age 35. Exception 1 does not apply. 53
Second Exception Ten Year Age Difference Trust > The trust provides that more than 25% of the trust corpus must be distributed to or may be withdrawn by one or more individuals who are Non-skip persons and Who are living on the date of death of another person identified in the trust who is more than 10 years older than such individuals. 54
Examples > Jane (Age 60) transfers $1,000,000 to a trust for the benefit of her sister, Barbara (Age 55), and Jane s descendants. Income and principal may be distributed to Barbara and Jane s descendants during her life. Upon Barbara s death, the trust terminates and 50% of the trust assets are to be distributed outright to Jane s children (Ages 35, 33 and 30). Exception 2 applies. > Same as above, except that at the time of the gift, Barbara is age 45 and Jane has four children ages 40, 38, 36 and 28. Exception 2 does not apply. 55
Yet Another Example Exceptions #1 and #2 > John creates a trust for the benefit of his wife, Betty, and his descendants. During John s life, income and principal may be distributed to Betty and John s descendants. Upon Betty s death, the assets will be divided into equal shares for John s three children. Each share will be distributed outright to the children 1/3 at age 30, 1/2 at age 35 and the balance at age 40. In 2017, John transfers $100,000 to the trust at a time when Betty is age 52 and John s children are ages 20, 23 and 26. Exception 1 and Exception 2 do not apply. > What about if a transfer is made in 2027??? Exception 2 applies! 56
Third Exception Partial Estate Tax Inclusion Trust > The trust provides that, if one or more individuals who are non-skip persons die on or before a date or event described in the first two exceptions, more than 25% of the trust corpus either Must be distributed to the estate or estates of one or more of such individuals or Is subject to a general power of appointment exercisable by one or more of such individuals. 57
Example > Jane transfers $1,000,000 to a trust for the benefit of her child and more remote descendants. The trust agreement provides that if the child dies before age 46, the child has a general power of appointment over more than 25% of the trust corpus. Exception 3 applies. 58
Fourth Exception Non-Skip Person Estate Tax Inclusion Trust > The trust is a trust any portion of which would be included in the gross estate of a non-skip person (other than the transferor) if such person died immediately after the transfer. 59
Examples > John transfers $1,000,000 to QTIP trust for the benefit of his wife, Emily. Upon Emily s death, the asset are divided into shares, per stirpes, for John s descendants and held in further lifetime trusts. John does not make a reverse QTIP election. Exception 4 applies. > If John makes a reverse QTIP election? The trust is not a GST trust because the transferor becomes Emily upon her death before any skip can occur. 60
Fifth and Sixth Exceptions CLATs and CRTs; CLUTs > The trust is a charitable lead annuity trust, charitable remainder annuity trust or a charitable remainder unitrust. > A charitable lead unitrust if the non-charitable remainder beneficiary is a non-skip person. > Special allocation rules apply to CLATs. 61
Problems with Crummey Powers > General Rule: A trust will not be a GST trust if any portion of the trust would be included in the gross estate of a nonskip person if such person died immediately after the transfer. A Crummey withdrawal right causes inclusion of the property subject to withdrawal in the powerholder s gross estate. > Exception: If the withdrawal right is limited to the gift tax annual exclusion amount, no portion of the trust will be treated as being includible in the non-skip person s gross estate as a result of holding such withdrawal right. > But watch out for hanging powers. 63
Example > Joe creates an irrevocable trust for the benefit of his only child, Emily, and Emily s children. Joe confers on Emily a power of withdrawal. > In year 1, Joe transfers $14,000 to the trust. > Emily has the right to withdraw the entire $14,000. Because the amount is within the annual exclusion, GST exemption is deemed allocated. > At the end of year 1, Emily s withdrawal right lapses only to the extent of $5,000. The remaining $9,000 carries over and may be withdrawn in subsequent years. > In year 2, Joe transfers an additional $14,000 to the trust. With respect to the addition, Emily has the right to withdraw $14,000. In addition, she has the continuing right to withdraw $9,000 from year 1. > Thus, in year 2, Emily has the right to withdraw $23,000 (an amount in excess of the gift tax annual amount). > As a result, after the first year, the trust will no longer be a GST trust and the automatic allocation rules will not apply. 64
Deemed Allocation to GST Trusts > The exceptions to the definition of a GST trust are imperfect. > Many trusts may be defined as a GST trust, yet the taxpayer would NOT want to allocate GST exemption. > Other trusts may NOT be defined as a GST trust, yet the taxpayer would want GST exemption allocated. > Accordingly, relying on the automatic allocation rules is unwise. 65
What Elections Are Available? > Taxpayer can effectively elect in and out of deemed allocation to indirect skips. > Taxpayers may elect to treat a trust that is not a GST trust as if it were, in order to make effective automatic allocations. 66
What Else You Should Know > An election out of the automatic allocation rules does not prevent the transferor from making an affirmative allocation of GST exemption to a transfer. 67
Effect of a Prior Election Out > The instructions to the Form 709 specifically provide that if a prior election out of deemed allocations to a particular GST trust for the initial transfer and all future transfers has been made, the box in Column C should not be checked and no explanatory statement should be filed for subsequent transfers. > May create confusion. > Consider attaching a Notice of Prior Election Out. 68
What is the ETIP? > The ETIP, or the estate tax inclusion period, is defined as any period after the transfer during which the property transferred would be includible in the gross estate of the transferor or the transferor s spouse if he or she were to die. > Subject to several exceptions. 69
Exceptions to the ETIP > A trust will not be considered subject to the ETIP if The possibility that the property will be included in the gross estate of the transferor or the transferor s spouse is so remote as to be negligible Less than a 5% actuarial chance. The transferor s spouse possesses a power of withdrawal that is limited to the greater of $5,000 or 5% of the trust corpus AND the right terminates no later than 60 days after the transfer to the trust. If a reverse QTIP election is made with respect to the transfer. 70
Allocations During the ETIP > Allocation of GST exemption (affirmative or automatic) to a trust subject to an ETIP does not take effect until the close of the ETIP. > However, any affirmative allocation of GST exemption to a trust during the ETIP is irrevocable. > A transferor can elect out of automatic allocation of GST exemption to a trust subject to an ETIP at any time up to and including the date a timely return for the year the ETIP closes can be filed. > A blanket election out of automatic allocation to future transfers will not avoid automatic allocation to transfers subject to an ETIP made in prior years. 71
Example > John contributes property worth $1,000,000 to a 2- year GRAT with a remainder worth $1,000. The GRAT is subject to an ETIP. NOTE: Some contend that a GRAT may be subject to the 5% ETIP exception, which would allow an automatic allocation at the inception of the trust. > John should affirmatively elect out of automatic allocation on the gift tax return reporting the GRAT. > At the close of the ETIP, if the GRAT is successful, John may consider making an affirmative late allocation. 72
Effect of Gift Splitting > An election by spouses to split gifts under section 2513 causes the deemed allocation rules to apply with respect to the spouse s GST exemption. > An election to split gifts may made on the first filed gift tax return for the year, even if the return is late. > This can result in irrevocable deemed allocations of the consenting spouse s GST exemption that are in effect retroactive. 73
Cautions about Gift Splitting > In order for the consenting spouse to elect in or out of deemed allocation the consenting spouse must file his or her own Form 709. 74
ALLOCATIONS AT DEATH Section 2632(e) 75
Affirmative Allocations at Death > A decedent s executor may affirmatively allocate the decedent s unused GST exemption to any transfers made by the decedent s during life or occurring upon death. > An allocation to a transfer made by the decedent during life would need to be made prior to the due date for the filing of the Form 706 and would be done in the same manner as a late allocation made by the transferor during life. > Allocations made at death are reported on Schedule R of the Form 706. 76
Deemed Allocations at Death > To the extent a decedent s GST exemption is not affirmatively or deemed allocated during his or her life or at death, Section 2632(e) sets forth a set of deemed allocation rules. > The decedent s unused GST exemption is deemed to be allocated in the following order: To direct skips occurring at death To trusts of which the decedent is the transferor and from with a taxable distribution or taxable termination might occur in the future. 77
Deemed Allocations at Death > If the decedent s unused GST exemption is insufficient to fully shelter all such transfers occurring at death, it is allocated pro rata, first among direct skips at death and then among trusts having GST potential. > The deemed allocations are irrevocable and take effect on the due date for filing the Form 706. > Prior elections out are ignored. > The fact that the trust does not qualify as a GST trust is ignored. > The deemed allocations rules at death generally result in the wrong result. 78
Sample Allocation of Exemption for Schedule R Taxpayer: JOHN DOE Taxpayer s ID No: XXX-XX-XXXX Attachment to and Made a Part of United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706 SCHEDULE R, Part 1, Line 9 ALLOCATION OF GST EXEMPTION 1. The executor of the decedent s estate hereby allocates to the Credit Shelter Trust created under Article of the decedent s Will so much of the decedent s unused GST exemption remaining at his death (within the meaning of Section 2631 of the Internal Revenue Code of 1986, as amended (the Code )) as shall be necessary so that the Credit Shelter Trust, as finally determined for Federal estate tax purposes, shall have an inclusion ratio of zero for generation-skipping transfer tax purposes. 2. Pursuant to Article of the decedent s Will, the executor is authorized to divide the Marital Trust created under Article of the decedent s Will into two or more separate trusts on a fractional basis. The executor hereby exercises her authority to divide and set apart the principal of the Marital Trust in order to create two separate trusts consisting, respectively, of (i) the GST Exempt Marital Trust, which shall be comprised of a fractional share of such principal the numerator of which is the amount of the decedent s unused GST exemption remaining after the allocation made to the Credit Shelter Trust by the executor pursuant to paragraph 1 of this Attachment, and the denominator of which is the value of such principal (values, deductions and exemptions used for the purpose of establishing the fraction to be as finally determined for Federal estate tax purposes), and (ii) the Non-Exempt Marital Trust which shall be comprised of the balance of such principal, each such trust to be governed by all provisions of the decedent s Will applicable to the Marital Trust. The executor hereby makes the special election under Section 2652(a)(3) of the Code with respect to the GST Exempt Marital Trust. The executor hereby allocates to the GST Exempt Marital Trust the remaining balance of the decedent s unused GST exemption so that the GST Exempt Marital Trust shall have an inclusion ratio of zero for generation-skipping transfer tax purposes. 3. The division of the Marital Trust described in this Attachment shall be done on a fractional basis and each trust created by such division shall be funded based upon the fair market value of the assets on the date of funding or in a manner that fairly reflects the net appreciation or depreciation in the assets from the valuation date for Federal estate tax purposes to the date the trusts are funded 79
Thank You Diana S.C. Zeydel Greenberg Traurig, P.A. Miami, Florida Nathan R. Brown Proskauer Rose LLP Boca Raton, Florida G R E E N B E R G T R A U R I G, L L P A T T O R N E Y S A T L A W W W W. G T L A W. C O M 2013 Greenberg Traurig, LLP. All rights reserved.