Printer Friendly

Lapsing Crummey powers and the GST tax.

The generation-skipping transfer (GST) tax is imposed on a "direct skip" to a "skip person," who is defined as:

* A natural person assigned to a generation two or more generations below the transferor's generation; or

* A trust if - all interests in the trust are held by skip persons, or - no person has an interest in the trust and at no time after the transfer to the trust may a distribution (including distributions on termination) be made to a non-skip person (Sec. 2613(a)).

An annual $10,000 exclusion from the GST tax is available for "direct skips." In addition, there is a $1 million exemption per donor.

The GST tax on subsequent distributions from a trust is determined by an "inclusion ratio," which (under Sec. 2642(a)) is the excess of one over the following fraction:

GST tax exemption

allocated to the trust

Value of the transfer

(less specified reductions)

In the case of a direct skip that is a nontaxable gift, the inclusion ratio is zero (Sec. 2642(c)(1)). However, this zero does not apply to a transfer to a trust for an individual's benefit unless the donee is the only permissible distributee during the donee's life, and the donee has a general power of appointment so that the trust property is includible in the donee's gross estate, if the trust does not terminate before the donee dies (Sec. 2642(c)(2)).

Certain trusts (such as life insurance trusts) are subject to a lapsing power of withdrawal (Crummey power) given to a grandchild. (Generally, these trusts do not meet the requirements of Sec. 2642(c)(2).) The effect of the Crummey power on the trust's inclusion ratio has been unclear; some practitioners have used a part of the $1 million exemption to assure zero inclusion for the trust. (See the Tax Clinic item, "Irrevocable Trusts and the Generation-Skipping Tax," TTA, Feb. 1992, at 101.)

However, the preamble to the proposed regulations released Dec. 23, 1992 (PS-73-88) states:

Additional "transferor" and "transfer" issues The proposed regulations clarify that a transfer to a trust subject to a beneficiary's right of withdrawal is treated as a transfer to the trust rather than a transfer to the beneficiary. On the lapse of a withdrawal right, the holder of the right becomes the tranferor of the trust to the extent the holder is treated as making a transfer subject to gift tax.

Thus, it appears that when the trust is subject to a Crummey power held by a grandchild, a portion of the $1 million exemption must be allocated to the trust. The proposed regulations state that a lapse of the Crummey power is a transfer to the trust.

In the insurance trust situation, this would be a trust not qualifying for zero inclusion. The lapse of the withdrawal power would not be treated as a taxable gift by the grandchild unless the value fo the right exceeded the greater of $5,000 or 5% of the value of the assets out of which the lapsed power could be satisfied (Sec. 2514(e)). (See also Prop. Regs. Sec. 26.2652-1(a)(5), Example 5.)

Therefore, it would be necessary to allocate only the portion of the grandfather's exemption up to the five and five limitations. If the power exceeded the five and five limitations, it might also be necessary to allocate a portion of the grandchild's exemption, depending on the trust's terms.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:generation-skipping transfer
Author:Olsen, Shirley H.
Publication:The Tax Adviser
Date:May 1, 1993
Previous Article:Reporting and auditing requirements for funded welfare plans.
Next Article:Accounting method change for depreciation attributable prior misclassification of property.

Related Articles
Do not overlook the income tax deductions for the GST tax.
Gift tax return filing traps and opportunities.
GST exemption allocations to life insurance trusts.
Minimizing the generation-skipping transfer tax with thoughtful use of the $1 million GST exemption.
Finality of inclusion ratio under final sec. 2642 regulations.
Eighth Circuit allows exception to GST tax.
Grandfathered trust modification permitted.
Crummey GST tax trap.
GST trap for the unwary.
Beware the GST tax when preparing gift tax returns.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters