Navigating the revised gift tax return.The 2003 Form 709, United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. Gift and Generation-Skipping Transfer Tax Example: Property is placed in a trust for the donor's child and grandchildren. The income may be "sprinkled" among the child and grandchildren in accordance with their needs and the principal of the trust will be distributed outright to the grandchildren following the child's death. Return, reflects changes to the generation-skipping transfer tax enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001. This article summarizes the changes and illustrates how to complete the revised schedules. The recently released 2003 Form 709, United States Gift and Generation-Skipping Transfer Tax Return, contains several modifications to help implement the generation-skipping transfer (GST GST abbr. Greenwich sidereal time GST (in Australia, New Zealand, and Canada) Goods and Services Tax ) tax changes enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001 (also known as EGTRAA 2001) ). The changes are designed to ease electing out of the automatic allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as of GST exemption and simplify tracking a donor's unused GST exemption. In June June: see month. 2002, the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Tax Division's Trust, Estate, and Gift Tax Technical Resource Panel's Form 709 Task Force met with the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. and submitted suggested changes to the form to take the new law into account. Many of the AICPA's suggestions have been included in the revisions to the 2003 Form 709. Reporting GSTs on Form 709 Form 709 is used to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. the gift tax on lifetime transfers. It is also used to calculate the GST tax on lifetime direct-skip transfers and to allocate To reserve a resource such as memory or disk. See memory allocation. the donor's GST exemption to (1) such transfers and (2) transfers to trusts that may produce a taxable distribution or taxable termination. Lifetime transfers subject to gift tax are reported on Form 709, Schedule A, Computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. of Taxable Gifts. Schedule A has been overhauled to accommodate the deemed (automatic) allocation of GST exemption rules applicable to lifetime indirect skips. It now contains Part 3-Indirect Skips, for reporting lifetime indirect skips. In addition, split gifts made by a spouse spouse A legal marriage partner as defined by state law are now reported separately on Part 1, Gifts Subject Only to Gift Tax; Part 2, Direct Skips; or Part 3, whichever is applicable, to facilitate electing out of the deemed-allocation rules on split gifts that are direct skips or indirect-skip transfers. Split Gifts Under Sec. 2513, spouses may elect to treat a gift made by one spouse to a third person as if the gift had been made one-half by each. Treating half of the gift as made by each spouse, regardless of who actually made the gift, allows use of the annual exclusion Annual exclusion A tax rule allowing the deduction of certain income from taxation. and applicable credit amount available to each spouse. In addition, because the gift tax rates are graduated, a split gift allows the total taxable gift to be taxed at each spouse's lower rate before either spouse moves on to the next bracket In programming, brackets (the [ and ] characters) are used to enclose numbers and subscripts. For example, in the C statement int menustart [4] = ; the [4] indicates the number of elements in the array, and the contents are enclosed in curly braces. . When a husband and wife elect gift-splitting for gift tax purposes, each spouse is also treated as the transferor of one-half of the gift for GST purposes, under Sec. 2652(a)(2). As a result, the deemed-allocation rules (which automatically allocate a transferor's GST exemption to direct skips and lifetime indirect-skip transfers) apply to split gift transfers as well. Thus, Schedule A is modified to allow the transferor to elect out of the deemed-allocation rules when they apply to split-gift transfers. In prior years, sprit gifts were not reported separately on Schedule A; only the transferor's gifts were listed on Schedule A, Part 1 or 2. The total split gifts to be reported to be spoken of; to be mentioned, whether favorably or unfavorably. See also: Report by the transferor's spouse were subtracted out when determining the transferor's taxable gifts for the year. Similarly, the total split gifts attributable to the transferor's spouse were added to the reporting spouse's other gifts to arrive at taxable gifts for the year. Because the net split gifts were not listed separately, it was difficult to identify gifts subject only to the gift tax from those potentially subject to both gift and GST taxes. In turn, this made it difficult to identify (1) direct-split transfers subject to the deemed-GST-exemption-allocation rules, complicating com·pli·cate tr. & intr.v. com·pli·cat·ed, com·pli·cat·ing, com·pli·cates 1. To make or become complex or perplexing. 2. To twist or become twisted together. adj. 1. the task of electing out and (2) other transfers that might warrant GST-exemption allocation, because they might produce a future taxable distribution or termination. The inability to identify individual split gifts for purposes of electing out of the deemed-GST-exemption allocation was compounded when the deemed-allocation rules were extended to lifetime indirect-skip transfers. Thus, split gifts made by the transferor's spouse are now listed separately in Part 1, 2 or 3 of Schedule A, Facilitating the ability to elect out of the deemed-allocation rules for split gifts that are direct skips or lifetime redirect-skip transfers. On the 2003 Form 709, the transferor's total gifts are reported in the top half of Part 1, 2 or 3 (whichever is applicable) of Schedule A. As with the prior form, the donee's name, relationship and a description of the gift are reported in column B. The donor's adjusted basis, the gift date and the gift's fair market value (FMV FMV - full-motion video ) are listed in the appropriate column. However, the split-gift portion of the transfer to be reported by the transferor's spouse is listed in column G; only the net amount of the transfer attributable to the transferor is listed in column H. Similarly, gifts made by the transferor's spouse for which gift splitting Gift splitting A technique used to avoid a gift tax in which a large sum of money to be given by two parents to a child is halved and given to the child separately For example, a husband and wife each donate $10,000 to their child rather than one parent donating $20,000. will be elected are reported in the lower half of Part 1, 2 or 3 of Schedule A. The portion of the split gift to be reported by the spouse who made the gift is listed in column G. This amount is subtracted from total gifts, so that only the net amount of the split-gift transfer is listed in column H of the reporting spouse's return. This simplifies identifying these gifts should the reporting spouse want to elect out of the GST deemed-allocation rules (if applicable). Example 1: On Jan. 12, 2003, Bill Gregg Gregg can refer to:
donor n. a person or entity making a gift or donation. DONOR. He who makes a gift. (q.v.) of one half of the gifts for gift tax purposes. Because the gifts are direct-skip transfers, they are included on Schedule A, Part 2. In Bill's case, the Texon stock would be listed in the top half of Part 2; $30,000 of the gift would be included in column G (because it will be reported by Jane), leaving a net transfer of $30,000 in column H. The full amount of the automobile Jane transferred would be listed in the lower portion of Part 2. The half of the gift ($14,000) that will be included on Jane's Form 709 is included in column G, leaving a net transfer of $14,000 in column H. Exhibit 1 on p. 740 illustrates Bill's completed Schedule A, Part 2. [ILLUSTRATION OMITTED] Reporting Direct Skips Form 709 is used to compute the gift and GST taxes on lifetime direct-skip transfers and to allocate a transferor's GST exemption to these transfers. Direct-skip transfers are reported on Schedule A, Part 2. In addition to the modifications for reporting split gifts (discussed previously), Part 2, Column C-2632(b) election, now provides a way to elect out of the deemed allocation of GST exemption. A direct skip occurs under Sec. 2612(c)(1) when property subject to either the estate or gift tax is transferred to a "skip person." Generally, under Sec. 2613, skip persons are individuals two or morn generation younger than the transferor (e.g., 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. ). A transfer to a trust is a direct skip (occurring at the time of the transfer) if all of the beneficiaries with an interest in the trust are skip persons. Direct skips can occur during life or at death. However, only lifetime direct-skip transfers are reported on Form 709. For a lifetime direct-skip transfer, a portion of the donor's unused GST exemption will automatically be allocated to the transfer under the deemed-allocation rules. If the donor wants to allocate GST exemption to a direct-skip transfer (including a split gift made by the donor's spouse), column C of Schedule A should be left: blank. The value of the transfer listed on Schedule A, Part 2, column H, should be entered on Schedule C, Computation of Generation-Skipping Transfer Tax, Part 1, Generation-Skipping Transfers, in column B (split gifts made by the donor's spouse are listed in the lower portion of Schedule C, Part 1).After reducing this amount by the annual GST exclusion (if applicable), the net value of the transfer for GST purposes is entered in column D (and Part 3, column B). An amount of exemption equal to the transfer's net value, or, if less, the value of the donor's remaining GST exemption, should be entered on Schedule C, Part 3, Tax Computation, column C. The GST exemption allocated to all direct transfers made during the year is then listed on Schedule C, Part 2, GST Exemption Reconciliation (Section 2631) and Section 2652(a)(3) Election, line 4. Example 2: The facts are the same as in Example 1. Bill would like to allocate a portion of his GST exemption to the transfer. Under the deemed-allocation rules, Bill's GST exemption will automatically be allocated to these transfers. As a result, they will carry to Schedule C, Part 1. Schedule C is then completed, so that the exemption amount used for the transfer can be tracked. Exhibit 2 on p. 741 provides a completed Schedule C for reporting Bill's transfers. [ILLUSTRATION OMITTED] If the transferor does not want to allocate GST exemption to the transfer, he or she can irrevocably ir·rev·o·ca·ble adj. Impossible to retract or revoke: an irrevocable decision. ir·rev elect out of the automatic Sec. 2632(b)(3) exemption-allocation rule for direct skips. The election is made by checking column C, in Part 2 of Schedule A and including the transfer's net value (from Schedule A, Part 2, column H) on Schedule C, Part 1, column B (split gifts made by the donor's spouse are listed in the lower portion of Schedule C, Part 1). Schedule C, Parts 1 and 3, are then completed to determine the GST tax due on the transfer. Reporting Indirect Skips The most obvious change to Schedule A is a new Part 3 for reporting lifetime indirect skips. For transfers after 2000, any unused portion of a transferor's GST exemption is automatically allocated under Sec. 2632(a)(1) to lifetime indirect skips to the extent needed to produce the lowest possible inclusion ratio for such property. However, an individual can elect not to have the automatic allocation rules apply. Part 3 was added to help track the GST exemption automatically allocated to indirect-skip transfers and to provide a way to elect out of the deemed-allocation rules. All redirect-skip transfers should be reported on Schedule A, Part 3. An indirect skip is any transfer of property (other than a direct skip subject to gift tax) to a GST trust. Generally, under Sec. 2632(c)(3)(A), a GST trust is any trust that could produce a taxable distribution or taxable termination as to the transferor. However, under Sec. 2632(c)(3)(B), certain trusts do not qualify as GST trusts, to help ensure the deemed-allocation rules only apply to transfers likely to warrant an allocation of the donor's GST exemption. (A discussion of these is beyond the scope of this article.) The transferor's total redirect-skip transfers are reported in the top half of Part 3, Schedule A. As with the prior form, the donee's name, relationship and a description of the gift are reported in column B. The donor's adjusted basis, the gift date and the gift's FMV are listed in the appropriate columns. If gift-splitting is elected, the split-gift portion of the transfer reported by the transferor's spouse is listed in column G; only the net amount of the transfer attributable to the transferor is listed in column H. Similarly, split gifts by the transferor's spouse are listed in the lower half of Part 3, Schedule A (see the above discussion on split gifts). Under the deemed-allocation rules, the donor's GST exemption will automatically be allocated to indirect skip-transfers made during the year. If the donor wants to allocate GST exemption to the indirect-skip transfer, column C should be left blank. The lesser of (1) the exemption amount equal to the value of the transfer in column H or (2) the donor's remaining GST exemption, should also be entered on Schedule C, Part 2 line 5 enabling the donor to track the amount used. Example 3: On March 21,2003, Bob Watts Watts, residential section of south central Los Angeles. Named after C. H. Watts, a Pasadena realtor, the section became part of Los Angeles in 1926. Artist Simon Rodia's celebrated Watts Towers are there. established a trust that will pay all of its income to his son, Dave, for life. The trustee can invade in·vade v. in·vad·ed, in·vad·ing, in·vades v.tr. 1. To enter by force in order to conquer or pillage. 2. principal for Dave's benefit, subject to an ascertainable as·cer·tain tr.v. as·cer·tained, as·cer·tain·ing, as·cer·tains 1. To discover with certainty, as through examination or experimentation. See Synonyms at discover. 2. standard. At Dave's death, the trust remainder will pass to Bob's grandson Keith. The trust will be funded with $1 million of highly appreciating 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. stock. The trust is a GST trust under Sec. 2632(c)(3). Because this is an indirect skip to a GST trust, there will be a deemed allocation of Bob's GST exemption to the transfer. Exhibit 3 at left provides a completed Schedule A, Part 3, for this transfer. Exhibit 4 at left presents a corresponding Schedule C, Part 2, allocating GST exemption to this transfer. Schedule C, Parts 1 and 3, do not need to be completed, because this is an indirect skip, and not a GST currently subject to tax. [ILLUSTRATION OMITTED] Often, a donor may not want to ,allocate GST exemption to an indirect-skip transfer to a GST trust (e.g., to preserve the exemption for a planned future transfer). Donors can elect not to have the deemed-allocation rules apply to an indirect-skip transfer to a GST trust, under Sec. 2632(c).The election is made by checking column C of Schedule A for each transfer the donor wants to exclude from the deemed-allocation rules. A statement identifying the transfer and describing the election should also be attached to the return. If the election is made, the transfer's net value should not be entered on Schedule C, because no exemption is allocated to the transfer. Example 4: The facts are the same as in Example 3, except that Bob Watts wants to preserve his GST exemption for a direct-skip transfer to a trust for his grandchildren that he intends to make in 2004. As a result, Bob wants to elect out of the deemed allocation of GST exemption. Bob should check column C of Part 3, Schedule A, and attach an explanatory ex·plan·a·to·ry adj. Serving or intended to explain: an explanatory paragraph. ex·plan statement, to elect out of the deemed-allocation rules. Because this is not a direct-skip transfer, Schedule C need not be completed. Allocating Exemption to a Non-GST Trust As discussed previously, many transfers to trusts that n, ay result in future taxable distributions or taxable terminations do not constitute indirect-skip transfers subject to the deemed-allocation rules. Examples include transfers to trusts that do not constitute a GST trust under Sec. 2632(c)(3)(B). These transfers should be reported on Schedule A, Part 1. Because these trusts are not subject to the deemed-allocation rules, donors must make an affirmative AFFIRMATIVE. Averring a fact to be true; that which is opposed to negative. (q.v.) 2. It is a general rule of evidence that the affirmative of the issue must be proved. Bull. N. P. 298 ; Peake, Ev. 2. 3. allocation of GST exemption to these trusts. A Notice of Allocation of GST Exemption should be used in these instances. In addition, the GST exemption allocated to these transfers should be listed on Schedule C, Part 2, line 6. Example 5: On June 16, 2003, Ann ANN, Scotch law. Half a year's stipend over and above what is owing for the incumbency due to a minister's relict, or child, or next of kin, after his decease. Wishaw. Also, an abbreviation of annus, year; also of annates. In the old law French writers, ann or rather an, signifies a year. Thomson established a trust that will pay all of its income to her daughter, Elly, for life. One-third of trust corpus will be paid to Elly when she reaches age 35, 45 and 55. At her death, any remaining corpus will be distributed to Ann's grandson Rick. The trust was funded with $700,000 of highly appreciating securities. The trust is not a GST trust, because more than 25% of trust corpus must be distributed to a non-skip person (Elly) before she reaches age 46; thus, the automatic allocation of GST exemption does not apply. If Ann wants to allocate GST exemption to this transfer, she should report it on Schedule A, Part 1, and attach a Notice of Allocation detailing the amount of exemption she wants to allocate to the transfer. Tax advisers may also want to add a footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." in Schedule A, Part 1, column B, referencing the attached Notice of Allocation for the transfer. In addition, the exemption allocated to the transfer should be listed on Schedule C, Part 2, line 6. Exhibit 5 on p. 743, and Exhibits 6 and 7, at left, provide a completed Schedule A, Part 1; Schedule C, Part 2; and Notice of Allocation for this transfer. [ILLUSTRATION OMITTED] As an alternative to filing a Notice of Allocation, the donor may elect to treat any trust as a GST trust as to any or all transfers made by the individual to the trust under Sec. 2632(c)(5)(A)(ii). in these instances, the deemed-allocation rules apply; the transfer would be reported on Schedule A, Part 3, in the same manner as an indirect skip to a GST trust. The election to be treated as a GST trust is made by attaching an election statement to a timely filed gift tax return for the calendar year for which the election is to become effective; see Sec. 2632(c)(5)(B)(ii). Conclusion Revisions to the 2003 Form 709 were in response to the favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. GST tax changes enacted by the EGTRRA. Reporting split gifts by type of transfer, segregating direct- and indirect-skip transfers and providing a simple mechanism for electing out of the deemed allocation of GST exemption highlight GSTs that may warrant an exemption allocation and greatly simplify the task of tracking a donor's use of the GST exemption. EXECUTIVE SUMMARY * Form 709, Schedules A and C, have been modified to facilitate an election out of a deemed allocation of the GST exemption and to track the amount actually used. * Split gifts made by spouses are now listed separately on Schedule A. * Schedule A has a new Part 3 for reporting lifetime indirect-skip transfers. For more information about this article, contact Mr. Smith at blake.smith@ppcnet.com. Exhibit 7: Notice of Allocation Notice of Allocation Pursuant to Sec. 2632 and Regs. Sec. 26.2632-1, the taxpayer elects to allocate the smallest amount of the taxpayer's GST exemption necessary to provide a zero inclusion ratio (as defined in Set. 2642(a) of the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. of 1986, as amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. ) to the following transfer to the Ann E. Thomson Family Trust. Based on the value reported in connection with Ibis ibis (ī`bĭs), common name for wading birds with long, slender, decurved bills, found in the warmer regions of both hemispheres. The body is usually about 2 ft (61 cm) long. Most ibises nest in colonies. transfer, and Sec. 2642(b)(1), this allocation will result in $700,000 of GST exemption being allocated and an inclusion ratio of zero, as detailed below. This is intended to he a formula allocation that will change if values are adjusted on audit. Name of Trust: Ann E. Thomson Family Trust Trust employer identification number Applicable to the United States, an Employer Identification Number or EIN (also known as Federal Employer Identification Number or (FEIN)) is the corporate equivalent to a Social Security Number, although it is issued to anyone, including individuals, who has to pay : 75-6075008 Item Number: 1 (Schedule A, Port 1, column A) Value of Gift: $700,000 GST exemption allocated: $700,000 (Schedule C, Port 2, line 6) Inclusion ratio offer GST exemption allocation: zero Blake T. Smith Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : Mr. Smith chairs the AICPA Tax Division's I rust, Estate, and Gift Tax Technical Resource Panel's (TRP's) Form 709 Task Force. Other members of the Form 709 Task Force are: Carol Barnes Carol Lesley Barnes (born 13 September 1944, Norwich, Norfolk) is a British television newsreader and broadcaster. She attended Sheffield University. Carol Barnes was part of the launch team of radio station LBC in 1973, and joined ITN as a reporter in 1975. , Bob Caplan, Nancy Hyde. David Lajoie, Terri Lawson, Eileen Sherr (Technical Manager) and Evelyn Capassakis (Trust, Estate, and Gift Tax TRP Trp tryptophan. TRP traumatic reticuloperitonitis. Trp tryptophan. Chair). Blake T. Smith, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Executive Editor and Senior Director of Product Development Practitioners Publishing Co. Fort Worth, TX |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion