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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.
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
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
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.
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.
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
© 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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