The Generation-Skipping Transfer Tax

On the third day at Heckerling, Julie Miraglia Kwon of McDermott Will & Emery LLP went beyond the basics of the generation-skipping transfer tax in “Beyond the Basics of GST Tax: Queries + Conundrums.”  Ms. Kwon, a frequent speaker at Heckerling on GST, gave us some key pointers.

The first issue she addressed was gift splitting.  While not exclusively a GST concept, she reminds us that if gift splitting is elected, all gifts must be split EXCEPT those that can’t be split and that each spouse is deemed to be the transferor of half of the gift.  If spouses elect to split gifts, the same election also applies for GST purposes. 

Gifts that cannot be split are gifts from one spouse to another, either outright or in trust, where the spouse’s interest is not ascertainable.  Ms. Kwon then cleared up how to allocate the GST exemption on a gift tax return where gift splitting is elected and there is a gift to a GST trust that cannot be split. 

This happens when one spouse makes a gift to a trust where the other spouse is a permissible discretionary beneficiary whose interest is not ascertainable, such as in the case of a spousal lifetime access trust or “SLAT.”  Because the gift to the trust cannot be split, the allocation of the GST exemption also cannot be split.  The spouse who is the transferor is treated as the transferor for GST purposes and should allocate GST exemption to the full amount of the gift.   The point is that for the allocation of GST exemption to be split, the gift must be split for gift tax purposes.   

Ms. Kwon also noted that the gift-splitting election may be filed on a late-filed gift tax return as long as it is the first filed return for that year.  Gift splitting is effective retroactively to the date of the gift.

Ms. Kwon next reminded us that gift-splitting is a gift tax concept and therefore does not apply for estate tax purposes.  IRC Secs. 2036 and 2038 which apply to gifts with retained interests or powers do not apply to the consenting spouse who did not actually make the gift.  So for example, with respect to a gift to a grantor retained annuity trust (GRAT), if the grantor dies during the trust term, the asset is pulled back into the grantor’s estate and his or her gift tax exemption is restored.  This is not so for the consenting spouse.

Ms. Kwon also pointed out that with a gift to a GRAT, especially a zeroed-out GRAT, gift splitting or allocating GST exemption are not often considered.  GRATs can be considered GST trusts and so an election out of the GST exemption on the date of the gift to the GRAT should be made if GST exemption is not intended to be allocated to the GRAT.

Furthermore, Ms. Kwon recommended electing in or out of the automatic allocation of the GST exemption on the first gift tax return filed for a gift to a trust.  The GST rules on indirect skips under IRC Sec. 2632(c) are not always clear and whether a trust is a GST trust or not is sometimes open to interpretation.  Don’t rely on anyone else’s interpretation.  Instead, you should make an affirmative election in or out. 

The final key point discussed was to not elect out of the automatic allocation rules just to elect back in.  This applies to return preparers who, wary of the automatic allocation rules, elect out of GST only to than prepare a notice of allocation to elect back in.  They are ignoring the key benefit of the taxpayer- friendly automatic allocation rules: They are automatic.  If the value of the gift should change on audit, then the GST allocation also automatically changes.  These rules are designed to protect the taxpayer in case of a missed election.  So why mess with the rules?

Ms. Kwon’s master class on GST was extremely informative, as all of her Heckerling sessions are, and she covered additional troublesome GST topics including: retroactive allocations, 9100 relief, qualified severances, formulas, modifications, mergers and did you know that that inclusion ratio should be rounded to the nearest one-thousandth? 

Good luck this filing season and don’t wait until October to start those gift tax returns!

And for more coverage of the 2021 Heckerling Institute on Estate Planning, please also see:

• Recent Developments Within Estate Planning
• Can a CRT Stretch an Inherited IRA?
• Strategic Estate Planning for Another Year of Change
• The Generation-Skipping Transfer Tax