Chapter 13 of the tax code has really complicated rules about the generation-skipping transfer (GST) tax. It’s a big deal because it can cause huge tax problems for families and their advisors. The GST tax rate is 55 percent and it applies to transfers of property from one generation to a generation two or more levels below, like from a grandparent to a grandchild. This article talks about some of the GST tax rules that apply to trusts used in estate planning to reduce taxes. It’s important for lawyers and financial planners to make sure these rules are followed correctly in every estate plan. The GST tax exemption of $1,030,000 can exempt all or part of a GST from GST tax. If you give a gift to someone who is two generations below you, any unused portion of your GST tax exemption will automatically apply to the gift. For gifts to someone one generation below you, you need to allocate the exemption on a federal gift tax return. It’s important to do this on time, as the value of the property determines the amount of exemption allocated. For example, if you give stock worth $500,000 and allocate $500,000 of your GST tax exemption, all future distributions from the trust to skip persons (two generations below) will be exempt from GST tax. The GST tax exemption must be allocated properly on a timely filed gift tax return. If the allocation is not made on time, the value of the trust’s property on the date of the late return will be used to allocate the exemption. The exemption must be clearly identified and a notice of allocation must be attached to the gift tax return. The IRS has been lenient in some cases of improper allocation, as long as the taxpayer has substantially complied with the regulations. When looking at a client’s past gifts for tax purposes, the practitioner should make sure that the GST tax exemption was allocated correctly. If it’s not clear, the client should consider getting a private ruling before making any more allocations. During certain times when property is included in someone’s estate for tax purposes, special rules apply to how GST tax exemption is allocated. For example, if someone gives a house to a trust, the time the trust is active is considered an estate tax inclusion period. This means that the value of the trust’s assets would be included in the person’s estate for tax purposes if they died during the trust’s term. If someone is transferring property and wants to exempt it from GST tax, they have to wait until the end of the ETIP to do it. If they do it during the ETIP, the value of the property for tax purposes will be the value at the end of the ETIP or when the person dies, whichever happens first. Once they allocate the exemption, they can’t change their mind. It’s important for their advisor to keep track of this so they don’t miss the deadline or end up wasting the exemption if the property loses value. It’s also a good idea to try to avoid having an ETIP in the first place when setting up a trust. To avoid taxes on certain trusts, lawyers can use specific provisions to prevent the trust from being subject to certain taxes. Three common trusts that can help reduce taxes are the qualified personal residence trust (QPRT), the grantor retained annuity trust (GRAT), and the grantor retained income trust (GRIT). If a beneficiary of these trusts dies before the trust term ends, their share of the trust would go to their descendants, which could be subject to taxes. To avoid this, the trust can be set up so that the remaining assets go only to non-skip persons, or an equalizing provision can be included in the grantor’s will or trust document. Another option is to distribute the remaining assets equally to the grantor’s children or to the estate of any predeceased child, but this could complicate the overall estate plan. The separate share rule is an important part of the GST tax regulations. It basically means that different parts of a trust can be treated as separate trusts for tax purposes, but only if they existed from the beginning. This is important because if a part of the trust could be subject to GST tax and it wasn’t set up at the start, then the whole trust would have to be exempt from GST tax. This could end up wasting GST tax exemption on parts of the trust that don’t need it. For example, if a grandfather sets up a trust for his children and grandchildren, and the grandchildren’s share is set up later, then the whole trust would need GST tax exemption, even though the children’s share doesn’t need it. To avoid problems in the previous example, when setting up a trust, separate shares can be created for anyone who will receive the trustâs assets in the future. This allows the person setting up the trust to allocate GST tax exemption to each share. The trust should also include language stating that any gifts to the trust are divided among the separate shares. This ensures that the rules for allocating tax exemption are followed, even if the person setting up the trust forgets to do so. There’s a $10,000 annual gift tax exclusion for giving money to a trust. There are specific rules to follow to make sure the gift qualifies for this exclusion, including making sure the trust is included in the beneficiary’s estate if they die before the trust is up. If these rules aren’t followed, the person giving the gift may have to pay a different tax. A Charitable Lead Trust (CLT) is a trust that pays money to charities for a certain period of time, and then gives the rest to non-charitable beneficiaries, like individuals or other trusts. There are different types of CLTs, but they all have to follow certain tax rules.
If the trust gives money to a non-charitable person at the end, they might have to pay a special tax called the GST tax. To avoid this tax, the trust can ask for an exemption, but it’s tricky to figure out exactly how much exemption they need. This is because the tax rules have a special adjustment that depends on how much money the trust makes over time.
So, if someone sets up a CLT with a non-charitable person as a beneficiary, they should know that it’s hard to predict how much GST tax exemption they’ll need. They might need to keep an eye on how much money the trust makes and ask for more exemption later on. The IRS has made it easier to make a reverse QTIP election on your estate tax return. You no longer have to check a box to make this election â if you list qualifying property on the form, it will be considered as making the election.
If the reverse QTIP election was not made on the first spouse’s estate tax return, the surviving spouse can apply for late relief to make the election. This can help save on taxes and give the surviving spouse more tax exemption to use.
It’s important to review the estate tax return to see if a reverse QTIP election was made, and to consider applying for relief if it wasn’t. This can have important tax implications for the surviving spouse. In summary, the GST tax provisions in the Code can be very complex and can affect estate planning and distributions to skip persons. It’s important for practitioners to be aware of these issues and consider them when creating estate planning documents or advising personal representatives and trustees. These issues can be easily overlooked but can have a significant impact. The Internal Revenue Code (IRC) has rules about the Generation-Skipping Transfer Tax (GSTT) for wealthy families. The GSTT applies when money or property is given to grandchildren or other descendants, skipping a generation. There are exceptions to the tax, like when an ancestor has already died. The tax exemption amount has changed over the years, and there are different rules for different types of trusts. It’s important to follow the rules and make the right tax elections on IRS forms to avoid paying more tax than necessary. In simpler terms, the Florida Bar wants its members to understand the importance of doing their job well, helping the public, and learning more about the law.
Source: https://www.floridabar.org/the-florida-bar-journal/generation-skipping-transfer-tax-its-bite-is-worse-than-its-bark/
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