Irrevocable trusts and the generation-skipping tax.

Irrevocable trusts can be an effective planning technique to reduce estate taxes. However, the effect of the generation-skipping tax (GST) in using such a trust must also be taken into account.

In order for gifts to an irrevocable trust to qualify as present interests (and therefore be eligible for the annual gift tax exclusion), trust beneficiaries are normally given Crummey withdrawal rights. For transfers after Mar. 31, 1988, such annual exclusion gifts are not exempt from the GST unless

-- the donee is the only permissible of appointment so that the trust property is included in the donee's gross estate.

If these requirements are not met, the transferor's GST exemption must be allocated to preserve a zero inclusion ratio.

For example, if a granfather establishes an irrevocable trust for the benefit of his three grandchildren and the trust provides Crummey withdrawal rights to each grandchild, the transfers are not exempt from the GST, since there is more than one permissible trust beneficiary. While all or portion of the transfers may avoid the gift tax because of the Crummey withdrawal right, to avoid the GST the grandfather would have to allocate a portion of his GST exemption.

From E.G. Schramka, CPA, Madison, Wisc.