Morrison & Foerster LLP: Allocation of GST Exemption to 2010 Gifts (Or Not!)

By Wendy M. Greenberg, Esq. of Morrison & Foerster LLP

Thanks to the eleventh hour passing of the 2010 Tax Relief Act (the "Act") and the temporary opportunities provided by the Act, our firm's Trusts and Estates group, like many others, completed a flurry of wealth transfer during the last weeks of 2010.  Of course, one of the most interesting and somewhat unexpected features of the Act was the retroactive reinstitution of the generation-skipping transfer tax for 2010 transfers, at a 0% rate and with an exemption allocable to $5 million of transferred assets.  With tax day 2011 approaching, we began to revisit issues associated with the allocation of this new exemption amount to the 2010 transfers, particularly because simply "paying" the tax instead costs nothing.  The determination of whether to allocate GST exemption to 2010 transfers is uniquely complicated, and there are some pitfalls to avoid.

Threshold Consideration: Automatic Allocation

GST exemption is automatically allocated to lifetime direct and indirect skips, unless the donor elects otherwise on his or her Form 709 reporting the gift.  A direct skip includes a transfer outright to a skip person (a natural person who is more than one generation below the donor, with some caveats) or to a trust in which either (i) all non-contingent interests are held by skip persons, or (ii) no person holds a non-contingent interest, and at no time after the transfer may a distribution be made to a non-skip person.

An indirect skip is a lifetime transfer (other than a direct skip) to a "GST Trust," which includes any trust which could make a distribution to a skip person unless:1

  1. More than 25% of the trust corpus is distributable to one or more non-skip persons before the attainment of age 46;
  2. More than 25% of the trust corpus is distributable to one or more non-skip persons who are living on the date of death of another person who is more than 10 years older than the non-skip person;
  3. On the death of one or more non-skip persons on a date on or before those described in (1) or (2), above, more than 25% of the trust corpus is distributable to the estate(s) of such non-skip person(s), or such persons hold a general power of appointment over the trust;
  4. Any portion of the trust would be includable in the gross estate of a non-skip person if such person died immediately after the transfer; or
  5. The trust is a charitable lead annuity trust, a charitable lead unitrust with a non-skip person as the remainder beneficiary, or any charitable remainder trust.

These rules are fairly complicated, so it is best not to rely upon their application.  Instead, actively allocate GST exemption where warranted, and actively elect out where not.

Considerations Relating to 2010 Gifts

Most importantly, it is fairly unlikely that one would wish to allocate GST exemption to direct skips made in 2010, as one could instead "pay" the 0% tax and retain all of his or her GST exemption for other transfers.  It was hoped that the IRS would revise Form 709 for 2010 gifts to require an election into, rather than out of, automatic allocation to direct skips, in order to avoid an inadvertent wastage of GST exemption.  Unfortunately, however, the recently issued 2010 Form 709 did not make this change, so care is required to opt out of automatic allocation of GST exemption to direct skips.  Of course, if the transferee trust is a dynasty trust or is otherwise likely to continue for a generation beyond that of the current skip person beneficiary (whether because of illiquidity or limited distributions to the current beneficiary or simply due to a sufficiently large corpus), it might make sense to allocate GST exemption to the transfer, even if it is a direct skip.

If the transfer is an indirect skip, the donor does not have the option of paying the 0% tax up front; instead, GST tax is levied if and as distributions to skip persons are made.  As before, if significant trust assets are not likely to survive for future generations, an allocation of GST exemption to the transfer would be a waste, and one should be careful to opt out of automatic allocation to that transfer.

Generally, the 0% GST tax applicable to 2010 transfers offered unprecedented and unexpected opportunities-be sure not to waste them by thoroughly considering whether and how to allocate GST exemption to 2010 transfers on gift and estate tax returns.


[1] List is simplified for brevity; caveats abound.

 

Morrison & Foerster's Trusts and Estates group provides sophisticated planning and administration services to a broad variety of clients.  If you would like additional information or assistance, please contact Patrick McCabe at (415) 268-6926 or PMcCabe@mofo.com.

© Copyright 2011 Morrison & Foerster LLP.  This article is published with permission of Morrison & Foerster LLP.  Further duplication without the permission of Morrison & Foerster LLP is prohibited.  All rights reserved.  The views expressed in this article are those of the authors only, are intended to be general in nature, and are not attributable to Morrison & Foerster LLP or any of its clients.  The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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