GST tax exemption - late allocation issues.
Allocation of GST Exemption
The allocation of the GST exemption to gifts made directly to a skip person is automatic and is required to be reported on the Form 709 reporting the gift in the year made. The donor, however, is allowed to make an election not to allocate the GST exemption to the gift and to pay the GST tax currently.
The allocation to gifts not made directly to a skip person (i.e., in trust) can be made: 1. At the time of the gift on a timely filed Form 709 for the year in which the gift was made; 2. On a notice of late allocation of GST exemption (notice) filed any time after the due date (including extensions) of the Form 709 for the year in which the gift was made; or 3. When there is a taxable distribution or termination of the trust received by a skip person.
Once a GST exemption allocation is made to a gift, it is irrevocable unless it is subsequently determined that the gift would have zero GST tax potential.
Late Notice of Allocation
The filling of a late notice of allocation of GST exemption usually occurs for one of two reasons. First, inadvertently, no GST exemption has been previously allocated to a trust with appreciable assets and one or more potential skip-person beneficiaries, in which there have been transfers made by gift in previous years. Second, intentionally, no GST exemption has been previously allocated to a trust with appreciable assets and one or more potential skip-person beneficiaries, in which there have been transfers made by gift in previous years.
Timing the Allocation
Timing the allocation of a taxpayer's GST exemption can be a valuable planning tool. With careful planning, the use of a taxpayer's lifetime exemption can be maximized for the benefit of the taxpayer and his heirs. Without proper planning, however, there are two pitfalls that can catch a taxpayer and his adviser by surprise. First, the exemption could be wasted on allocations to trusts that ultimately have a lesser value than the amount of exemption allocated to the trust (e.g., trusts comprised of potentially high-risk or speculative assets). Second, the exemption could not be allocated to trusts that ultimately have substantially increased in value over the amount of gifts made to the trust (e.g., trusts comprised of life insurance policies).
Life Insurance Trusts
As life insurance trusts are perhaps the most common trusts for which allocations of the GST exemption are made, discussion of planning opportunities and the mechanics of filing a late notice of allocation with focus on these trusts. The first consideration for determining the time for filing a notice is whether the trust has any skip-person beneficiaries currently or has the strong likelihood of having skip-person beneficiaries. This with require a thorough understanding of the trust agreement and a familiarity with the donors current and projected "family tree." Once it has been determined that there are or will be skip-person beneficiaries, the type of policy or policies held by the trust should be determined. For term life insurance policies with no cash surrender value accumulating, the tax adviser should consider making an allocation of GST exemption to the trust as late as possible; under current law, the value of such policy would be determined on the date the late allocation is filed and would be based on the unexpired premium on that date.
The value of die unexpired premium on a given date would be substantially less than the total of all premium payments made to date, which is the amount of GST exemption that would have been used if the exemption amount was allocated on timely filed returns as the gifts were made. This approach is a gamble, if the insured were to die suddenly before the allocation was made to the trust, the full face value of the policy would be subject to GST tax when the skip person received the proceeds. Although the benefit is not as great, the same analysis would hold true for a whole life insurance policy with cash surrender value. The value that will be used in the late allocation for the whole life policy essentially would be equal to the policy's cash surrender value on the
Once an exemption allocation has been made to a trust, it is advisable to include an allocation of exemption to annual gifts to die trust on a timely filed gift tax return. This will keep the trust 100% exempt from GST tax. Otherwise, the trust will be only partially exempt, when the proceeds are received by a skip person, there will need to be an allocation of exempt and nonexempt receipts.
When it has been determined that it is appropriate or necessary to file a late notice for a donor, the value of the trust assets needs to be determined as of the date the notice will be postmarked to the IRS. Alternatively, the Service has provided an election, in which the trust's value as of the first day of the month in which the notice will be filed can be used. The best way to support the value of the life insurance policy usually is to request a Living Form 712 from the life insurance company as of the required valuation date. Once the value of the trust assets has been determined, a "Notice of Late Allocation of GST Exemption" should be prepared, including all the following information: * The trust name and employer identification number. * The value of the trust. * The date of the value of the trust. * The annual exclusion claimed against the gift. * The amount of exemption allocated to the gift.
It is also advisable to include a formula clause that indicates, if the trust's value is later determined to be different than reported, that the donor allocates the minimum amount necessary to achieve the desired inclusion ratio of the gift (which normally would be zero). And, finally, there should be a statement attached indicating the desired inclusion ratio of the trust as a whole after the current allocation of exemption (which normally would be zero as well).
AICPA Task Force on Restructuring the Internal Revenue Service
The AICPA Tax Division has established a Task Force, with Don J. Summa, Retired partner, Ernst & Young LLP, as chairman, to provide input to the National Commission on Restructuring the Internal Revenue Service. Members of the Task Force are: David G. Blattner, Deloitte & Touche LLP; Phillip G. Brand, KPMG Peat Marwick LLP; Alan R. Einhorn, Deloittre & Touche LLP; Gary J. Gasper, Washington Counsel, P.C.; Nancy Hyde, Onstott, Craddick & Hyde, Inc.; Robert M. Pielech, Pielech & Pielech; and Jay Starkman, PC.
The National Commission has indicated it will address the following six issues in its study of the IRS: 1. Quality of service given to taxpayers by the IRS. 2. Management and governance structure of the IRS. 3. Quality of the IRS workforce and possible privatization of some IRS functions. 4. State-of-the-art technology for the IRS. 5. Financial accountability of the IRS. 6. Complexity of tax administration - causes and solution.
The AICPA Task Force would appreciate receiving any thoughts you have regarding problems and possible solutions in any of these areas. Please fax your comments and suggestions as soon as possible, but no later than Dec. 31, 1996, to Jean E. Trompeter, AICPA Tax Division, at (202) 638-4512.