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Lane, JD, CFP, MBA
Lane, JD, CFP, MBA, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 6224
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Gifts and Form 709.

Resolved Question:

I have a question about gifts and Form 709. A father transferred $1 million of stock to a generation skipping trust for his son, (there are no grandchildren). It is actually an irrevocable defective grantor trust.  Does this get reported in Part 1 as a gift to his son (not part 2 or 3) of schedule A?

Submitted: 1 year ago.
Category: Tax
Expert:  Lane, JD, CFP, MBA replied 1 year ago.

Lane: If you do that would, pre-empt the ability to continue the deferral, this is an allocation/election issue. The answer is - it depends. One can affirmatively allocate GST exemption for unborn skip persons. GST exemption allocations where there is no potential for GST taxation are void so if no skip persons ever exist, there can BO GST tax and allocation has no effect. However, a "trust will also be a skip person if there are no interest in the property transferred to the trust help by any person, and future distributions of terminations from the trsut can be made only to skip persons." (709 instructions, p. 7 and I.R.C. § 2613 (a))

Electing out of the default rule and affirmatively allocating the exemption can avoid GST tax on future appreciation. 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. § 26.2613-1.

You need to talk to the trustee/attorney or grantor and find out what the objective is. If assets are such that - eventually there will be a use for the GST. In actuality, Form 709 does not need to 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 ration." IRS § 6501 (a).

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

Customer: Previously the attorney told me they wanted to use up the GST with this transfer to the trust.

Lane: Right, so it's a transfer to the trust. Again, I'd talk to the attorney and see whether he means allocate or preserve. Typically, this is not to be part 1, but it is a choice and will affect future use.

Customer: Okay, so if it is determined they want to allocate the GST now, it would be reported as a gift to the trust?

Lane: Yes. This is a very open-ended technique. I'd really talk to the attorney; he'll be very specific on the 709 question and relative to which options are being kept open.

Customer: And this would be a direct skip?

Lane: Again, depends. Direct Skip means a transfer subject to gift or estate tax made to a skip person including trust if all trust beneficiaries are skip persons. IRC § 2612 (c)(a). Transfers to trust having both non-skip and skip persons as beneficiaries are not direct skips. If 3rd generation planning is what is being left open too, this would not be a direct skip.

Customer: I am waiting for a copy of the trust document, so I don't know for sure what the details are until I get that.

Lane: I think a quick call to the attorney could be very efficient. The way this can be used in the future will turn, at least partially; on how/whether you do the 709. You could call the grantor, but that might effectively be passing the buck, with this technique, your client my not understand fully.

Customer: I am trying to get the understanding of whether the trust can be a skip person, per your responses/definition above, so I can see once I get the document. It is actually possible for the IDGT to be a skip person if distributions can only be made to skip persons (even though they don't exist yet)?

Lane: Yes.

Customer: The attorney would know, but I want to make sure I understand the 709 reporting prior to calling him so I know when he provides answers if I have any other questions to ask.

Lane: Skip Person means (i) a natural person donee who is a generation that is at least two generations below the transferor's generation, i.e. a grandchild, great-grandchild, great-niece, etc., (ii) one statutorily "assigned" to such a generation (e.g. beneficiaries 37.5 years younger than the transferor) or (iii) trusts if all interests in property transferred to the trust are help by skip persons. I.R.C. § 2613(a).

Form 709 instruction, p.7, Determining the Generation of a Donee; Regs § 26.2651-1.

Customer: Okay, so if the trust only allows for distributions to skip persons, then the trust is a skip person and then be reported as an indirect skip in part 3 to the trust?

Lane: Exactly, which would be the more common scenario. Do you know if there are assets (assel levels) such that even with portability, so 10,500,000 if they both passed today, there may be a need to shelter more than that.

Customer: They may have more assets than that. Then I think you're going to end up in part 3. Thank you, you have been very helpful. I was able to complete the gift tax return with your assistance/information provided above. It was extremely helpful.

Lane, JD, CFP, MBA, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 6224
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane, JD, CFP, MBA and 5 other Tax Specialists are ready to help you
Expert:  Lane, JD, CFP, MBA replied 1 year ago.

I truly appreciate it.

Thank you.

Lane, JD, CFP, MBA, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 6224
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane, JD, CFP, MBA and 5 other Tax Specialists are ready to help you

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