Printer Friendly

GST planning opportunities.

Early planning can yield great benefits with the generation-skipping transfer (GST) tax exemption. Whenever possible, a GST trust should be used for new business opportunities. First, the trust can be funded with cash; the trust can then purchase a business interest. This strategy avoids valuation challenges if the business interest appreciates rapidly and minimizes the initial GST tax-exempt allocation.

Other GST tax planning opportunities include:

1. Maximize the direct payment of college and medical expenses that are exempt from gift tax and disregarded when computing the $10,000 annual gift tax exclusion.

2. Consider making as many $10,000 annual exclusion gifts as possible. A powerful way to use the annual exclusion is to take advantage of Sec. 529 qualified state tuition programs. A grandparent may give up to $50,000 per grandchild, spread this amount over five years and shield the gift from tax by using the annual exclusion. The income on a qualified state tuition program account grows tax-free, and the grandchild is taxed when he withdraws the funds for college education expenses.

3. Use the $1 million GST tax exemption during life and focus on leveraging the transfer with assets with the greatest potential for appreciation.

Long-term GST trusts should be created for the exclusive benefit of grandchildren, if the parents Can afford to forego the income. If children need trust income, consider making them discretionary (rather than mandatory) beneficiaries.

The optimal trust term to defer transfer taxes is a trust that will end on the expiration of the period established by the Rule Against Perpetuities. Alaska, Delaware and other jurisdictions that have abolished the rule make excellent jurisdictions to establish dynasty trusts, designed to build up as much trust corpus as possible for future generations.

When designing a dynasty-type trust, a trustee should have broad discretionary powers, including the power to make distributions. To optimize a transfer of wealth to future generations, a trust should purchase assets (such as a business or a home) for grandchildren's use. Senior family members should consider loaning money to a GST trust to invest in new business opportunities.

Charitable lead unitrusts (CLUTs) are also useful in GST tax-exemption planning. CLUTs are attractive, because a GST tax exemption can be allocated when the trust is funded: The GST tax exemption can be allocated only after the charity's income interest has expired for a charitable lead annuity trust. A CLUT should be considered only if it is estimated trust assets will perform at a rate of return in excess of the Sec. 7520 rate. A possible strategy to exceed the Sec. 7520 rate is to first place assets in a family limited partnership (FLP) and to contribute partnership interests to a CLUT. The Sec. 7520 rate is computed on the value of partnership interests, after any relevant discounts are considered.

The prohibitions against self-dealing apply to charitable trusts. Charitable trusts should not purchase an asset from a related party, including the grantor's FLP or closely held business. Also, the self-dealing rules apply if a beneficiary uses trust property.

COPYRIGHT 2000 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:generation-skipping tax
Author:Willey, Susan L.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Apr 1, 2000
Previous Article:Foreign asset-protection trusts.
Next Article:Grandfathered trust modification permitted.

Related Articles
Irrevocable trusts and the generation-skipping tax.
Reporting trust distributions.
Minimizing the generation-skipping transfer tax with thoughtful use of the $1 million GST exemption.
Finality of inclusion ratio under final sec. 2642 regulations.
Beware not allocating the GSTT exemption on a gift tax return - a trap for the unwary.
Eighth Circuit allows exception to GST tax.
Grandfathered trust modification permitted.
"Wait and see" GST tax planning.
Beware the GST tax when preparing gift tax returns.
New regs. on elections for indirect skips: final regulations on indirect skip transfer elections give taxpayers many generation-skipping transfer tax...

Terms of use | Privacy policy | Copyright © 2021 Farlex, Inc. | Feedback | For webmasters |