Gift tax return filing traps and opportunities.When reviewing 1994 gift tax return filing requirements, practitioners should be aware of the traps and opportunities that may be present. GST GST abbr. Greenwich sidereal time GST (in Australia, New Zealand, and Canada) Goods and Services Tax annual exclusion Annual exclusion A tax rule allowing the deduction of certain income from taxation. Most gifts in trust do not qualify for the generation-skipping tax (GST) annual exclusion. The reason is that so-called Crummey withdrawal powers are no longer effective for GST purposes, even though they continue to qualify transfers for the gift tax annual exclusion. Therefore, if trust property may one day benefit grandchildren GRANDCHILDREN, domestic relations. The children of one's children. Sometimes these may claim bequests given in a will to children, though in general they can make no such claim. 6 Co. 16. or more remote descendants DESCENDANTS. Those who have issued from an individual, and include his children, grandchildren, and their children to the remotest degree. Ambl. 327 2 Bro. C. C. 30; Id. 230 3 Bro. C. C. 367; 1 Rop. Leg. 115; 2 Bouv. n. 1956. 2. , it may be advisable to allocate a portion of the donor's $1 million GST exemption to avoid future GST liability. Although gifts to most trusts are susceptible, irrevocable life insurance trusts are most frequently affected. Practitioners should consider that their clients may incorrectly think premium payments and other below-$10,000 gifts to trusts are not taxable, particularly for trusts created before the Crummey repeal's Mar. 31, 1988 effective date. Note also that gifts and trust property passing to individuals more than 37 1/2 years younger than the donor may be subject to GST, regardless of family relationship (Sec. 2651). Minimizing use of the GST exemption Extending the gift tax return provides an opportunity to minimize the amount of GST exemption needed to cover a gift. * If the exemption is allocated in a timely filed gift tax return (including extensions) for the year of transfer, the exemption utilization is based on the date-of-gift value. Therefore, if the property (including income) increases in value from gift date to extended due date, the return is filed timely and the exemption is used based on date-of-gift value. * If the exemption is allocated after the due date (as extended), the exemption must be applied based on the filing-date value. Therefore, if the property value (including income) declines between the gift date and the extended due date, the GST exemption allocation is filed immediately after the extended due date. Note that this GST strategy does not alter the timing of any required gift tax payment or the need for filing a timely return for other purposes. Using this strategy may require some complex calculations and, potentially, two filings (a timely gift tax return and a "late" allocation election). Therefore, it typically is considered only when the total amount of generation-skipping gifts is significant. Special disclosure and election requirements Special disclosure requirements apply to reporting transactions subject to the special valuation rules of Sec. 2701. Potentially affected transactions include corporate and partnership equity transfers and transactions, if more than one family member is an owner of a closely held corporation Noun 1. closely held corporation - stock is publicly traded but most is held by a few shareholders who have no plans to sell corp, corporation - a business firm whose articles of incorporation have been approved in some state with outstanding preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. or a closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people. In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. partnership that includes special allocations. Special disclosure rules also apply to transactions subject to Sec. 2702, relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc grantor An individual who conveys or transfers ownership of property. In real property law, an individual who sells land is known as the grantor. grantor n. retained annuity trusts (GRATs) and unitrusts (GRUTs) and personal residence trusts. Failure to comply with these requirements suspends tolling of the gift tax statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought. Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. (SOL). If a transaction is subject to Sec. 2701 or 2702, proper reporting is required to start the SOL, even though no senior interests are valued at zero. Even if no gift was intended, it generally is advisable to file a return to start the running of the limitations period. Example 1: An individual exchanges common stock of a family-owned business for cumulative preferred stock Cumulative preferred stock Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Related: Non-cumulative preferred stock. but makes no gifts of the common stock to other family members. Assuming both the preferred and common stock interests are properly valued under Sec. 2701, no gift has occurred. However, the SOL does not begin running unless the transaction is disclosed on a properly filed gift tax return. The disclosure required by Regs. Sec. 301.6501(c)-1(e) includes a description of the transaction; the relationship between the transferor and any potential transferees; a detailed description of the method used to determine the gift amount (including the computation of any gift using the subtraction subtraction, fundamental operation of arithmetic; the inverse of addition. If a and b are real numbers (see number), then the number a−b is that number (called the difference) which when added to b (the subtractor) equals method in Regs. Sec. 25.2701-3(b)); actuarial ac·tu·ar·y n. pl. ac·tu·ar·ies A statistician who computes insurance risks and premiums. [Latin factors and discount rates; and, if Sec. 2701 applies, detailed historical financial information. Under Sec. 2701, a preferred interest is considered to have value only to the extent it has the right to receive qualified payments (as defined in Regs. Sec. 25.2701-2(b)(6)). Qualified payment rights generally are dividends or distributions that are cumulative and payable periodically at a fixed rate. In the event a preferred interest does not meet this definition, an election generally can be made under Regs. Sec. 25.2701-2(c)(2) to treat a distribution right as a qualified payment right. However, making this election subjects the owner to the imputed Attributed vicariously. In the legal sense, the term imputed is used to describe an action, fact, or quality, the knowledge of which is charged to an individual based upon the actions of another for whom the individual is responsible rather than on the individual's gift provisions of Sec. 2701(d) if payments are not timely made. This election is irrevocable and must be made on a timely filed gift tax return. If there is any doubt as to whether a distribution right meets the qualified payment definition, it may be advisable to make a "protective" election treating it as a qualified payment right. In some situations, a qualified payment election may be required for an individual not directly involved in the actual transfer. If a preferred interest is held by an applicable family member of the transferor (defined as the transferor's spouse, any ancestor ANCESTOR, descents. One who has preceded another in a direct line of descent; an ascendant. In the common law, the word is understood as well of the immediate parents, as, of these that are higher; as may appear by the statute 25 Ed. III. De natis ultra mare, and so in the statute of 6 R. of the transferor or the transferor's spouse, or the spouse of an ancestor), a qualified payment election must be made by the applicable family member and attached to the transferor's gift tax return. Example 2: Parent P owns preferred stock; his child C gives common stock to grandchild GC. Unless P makes a qualified payment election, C must value P's stock at zero to determine the common stock gift value. This election is necessary even if P's preferred stock otherwise meets the definition of qualified payment rights. P's election is made on C's timely filed gift tax return (Regs. Sec. 25.2701-2(c)(5)). If P makes the election, he becomes subject to the Sec. 2701(d) imputed gift rules if the qualified payments are not timely received. |
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