============================================== This Report contains coverage of additional Wednesday sessions, including ============================================== Special Session I-D - Disunification of GSTT and Gift Tax Exemptions
Wednesday Afternoon, 1/12/05 Reporter: Shelly D. Merritt After EGGTRA, the GST tax exemption and the exemption from gift tax are no longer unified. The gift tax exemption remains at $1 million, while the GST exemption is currently at $1.5 million and is scheduled to increase until 2010 when the estate and GST tax are repealed. This dis-unification creates numerous issues with gift planning. In addition, because gift tax exemption is automatically allocated to taxable gifts, whereas GST exemption is not, it is possible that a person will have differing amounts of gift tax exemption and GST tax exemption. In this workshop, Ms. Harrison focused on some of the issues raised by dis-unification as well as how to postpone generation-skipping transfers. Cascading Crummey Powers When a Crummey power lapses, for GST tax purposes, the power holder
becomes the transferor with respect to the excess of the greater
of $5,000 or 5%. To avoid possibly including the trust assets in a beneficiary's estate under IRC Section 2036 when using "cascading Crummey powers," it is advisable to: 1. Make the beneficial interest wholly discretionary so that no power holder has the "right" to any amount from the trust; 2. Use independent trustees so that no power holder has the right to control beneficiary enjoyment; and 3. Establish the trust in a jurisdiction that prevents creditors from reaching trust assets to satisfy the power holder's debts. Late Allocation of GST Exemption A late allocation of GST exemption to an existing trust that has
an inclusion ratio of more than zero may be an effective way to
use the excess amount of a person's GST exemption over the gift
tax exemption. For example, an allocation at the close of the "Estate
Tax Inclusion Period" A late allocation of GST exemption does not relate back but instead is effective on the date the gift tax return making it is filed. As a result, if there has been a taxable distribution before the late allocation, it will not be covered. A late allocation cannot be made on timely filed gift tax return. For this reason, it is important to note that an extension for the taxpayer's income tax return automatically extends the gift tax return due date. If a trust is subject to the automatic allocation rules and the taxpayer wants to make a late allocation, two gift tax returns must be filed. One to elect out of the automatic allocation rules and another to make the late allocation. The new automatic allocation rules could cause existing trusts
to have inclusion ratios. A late allocation of GST exemption can
be used to give the trust a zero inclusion ratio. For example, if
a trust was established in 1998 and gifts made to it but no GST
exemption was allocated, the trust would have an inclusion ratio
of one. If the trust meets the definition of a GST Trust under the
new rules and contributions are made after 2001, then GST exemption
will automatically be allocated to the trust for each of these contributions.
The trust will end up with an inclusion ratio other than zero or
one. This ratio will change each year that gifts are made to the
trust unless the trust elects out of the automatic allocation rules. Late allocation to term life insurance policies Another planning option is to make a late allocation to an ILIT holding term insurance right before end of each year when the interpolated reserve value is almost zero rather than making the allocation when the premium is paid at the beginning of the year. So long as the insured doesn't die before the late allocation is made and is effective, this will leverage the use of the grantor's GST exemption. As long as the contribution to the trust is made during the first quarter of the year, there will always be a timely return yet due so there is little risk to doing this. Qualified Severances A qualified severance is any division of a single trust into two or more trusts if the division is permitted by the instrument or local law, the trust assets are divided on a fractional basis, and the terms of the new trusts provide, in the aggregate, for the same succession of interests of beneficiaries as are provided in the original trust. Proposed Regulations 26.2642-6 dealing with Qualified Severances were issued on August 24, 2004. The regulations provide that if a trust is divided into two trusts, the new trusts will be treated as separate trusts for GST purposes only if the severance is a "qualified severance." Requirements for a qualified severance: 1. The severance must be pursuant to the trust instrument or local law. 2. The severance must be effective under local law. 3. Each trust must receive a fraction of the total value of the trust (not a pecuniary amount). 4. The terms of the new trusts must provide, in the aggregate, for the same succession of interests of beneficiaries as the original trust. 5. The severance must be reported on a Form 706-GS(T) "Generation-Skipping
Transfer Tax Return for Termination," and must write "Qualified
Severance" The proposed regulations provide that they repeal Treas. Reg. 26.2654-1(b) which allows for the severance of trusts that are included in the transferor's estate or created under the transferor's Will when certain funding requirements are met. Ms. Harrison believes this is an error in the proposed regulations. For example, if D's revocable trust makes a gift to a trust for descendants of the largest pecuniary amount that can pass to the trust without incurring or increasing federal estate tax and the residue to a marital trust, under T.R. 26.2654-1(b), D's GST exemption may be allocated to the pecuniary gift to the trust for the descendants. However, under the proposed regulations, this gift would not qualify for severance because it is not a fractional share gift. Non-Qualified Severances (i.e., by not giving notice to IRS) For purposes of Chapter 13, separate trusts are not treated as separate for GST purposes unless the separate trusts exist from the inception of the trust. For example, T creates a trust for T's children that provides the Trustee with the discretionary power to distribute income or corpus to T's children. When the youngest child reaches age 21, the trust is to be divided into separate trusts for each child which provides for income to the child during life, principal to child's children on child's death. The separate trusts created when the youngest child reaches age 21 do not qualify as separate trusts for GST purposes since the trusts did not exist from and at all times after the creation of the trust. Any allocation of GST exemption to the trust either before or after the youngest child reaches age 21, will apply to the entire trust. If a qualified severance of a trust that distributes per stirpes occurs, the division of a discretionary trust will cause the new trusts to be separate for GST tax purposes and a taxable termination will occur on the death of each non-skip beneficiary (child). Planning can be done to postpone a taxable termination with such a trust by making a non-qualified severance. The taxpayer can take the position under this scenario that since there is no qualified severance, a taxable termination does not occur until the last child (non-skip person) dies instead of upon each child's death, even though each child has a separate trust since the separate trusts did not exist from inception. It may be a good planning strategy to provide that on the taxpayer's death, the residuary estate passes to one discretionary trust for all of the decedent's children for a certain period of time, such as 2 years, and then divides into separate shares for the children. Discretionary CLATs Discretionary CLATs can also be used to postpone a generation skipping transfer. If a charitable lead annuity trust (CLAT) gives an independent trustee discretion to select the charities to whom distributions may be made, no person has an interest in the trust for GST tax purposes until the lead interest ends. A transfer to a discretionary CLAT is not a direct skip and even if only skip persons have interests in the trust when the lead interest terminates, a taxable termination will not occur because an interest in the trust, as defined for GST tax purposes, will not have terminated. Transferring Remainder Interests If a remainder beneficiary of a trust sells or gifts his or her remainder interest to skip persons, such as the beneficiary's children, it is arguable that the "transferor" of the remainder interest for GST tax purposes should be the remainder beneficiaries and not the donor. For example, grantor creates a GRAT which passes to the grantor's child at then end of the GRAT term. After funding the GRAT, child gives his remainder interest to a trust for the benefit of the child's children (grantor's grandchildren). When the GRAT term expires, if the child is the transferor for GST purposes, there will be no generation skipping transfer because the child's children are not skip persons as to the child transferor. However, the IRS ruled in PLR 200107015 that where a remainder
beneficiary of a charitable lead trust (CLAT) makes a gift of his
remainder interest, the remainder beneficiary is the transferor
for GST tax purposes only to the extent of the percentage that the
value of the remainder interest bears to the value of the trust
at the time of the beneficiary's transfer and the original grantor
remains the transferor as to the balance. In Ms. Gift Splitting The gift splitting rules differ for GST tax purposes than for gift tax purposes. For gift tax purposes, gifts to a spouse, including interests in trusts, cannot be gift split. For GST tax purposes, the electing spouse is treated as the transferor of one-half of the property transferred, regardless of the interest the electing spouse is deemed to have in the transferred property. ===================================================== Michael L. Graham of Dallas and Gregory S. French of Cincinnati hosted a vibrant dialogue joined into by many of the attendees at this follow up session to Graham's HIPAA presentation on Tuesday at the Heckerling Institute. Based upon a case study prepared by French, the session attendees explored the Model Rules of Professional Conduct and the Aspirational Standards for the Practice of Elder Law Of the National Academy of Elder Law Attorneys, the comments to
the Rules and the ACTEC Commentaries to the Rules, as well as our
mutual experiences, and struggled with the difficult questions involving
individual capacity and family relationships that arise in our practices.
The nuances of client identification, confidentiality, conflicts
of interest, client capacity, fiduciary issues, long-term care planning
and documentation dealing with health issues were examined in a
lively session. The complexity of these issues is recognized by
most attorneys who assist older clients and their families. The
necessity of representation letters creating single or joint representation,
even letters for multiple generations of a client family was agreed
upon by the attendees. The proactivity of the attorney in connection
with assessing client capacity, pursuing solutions for incapacitated
clients and protecting client confidentiality was discussed. Attorneys
should review the often counter-intuitive rules in their states
and in the resources named above. There will be more and more circumstances
facing us in the years ahead as our clients age and require different
kinds of assistance than we have given them in the past. Embroiled
in family relations gone "postal" and fueled by money
-related issues, the attorney who wants to avoid liability while
serving his/her client well will want to be familiar with the representation
landscape and will be thankful that he/she has prepared for these
issues as well as possible. The new 4th edition of the ACTEC Commentaries to the Model Rules will be published this year; get your copy and use it well, along with the other resources noted above. ===================================================== Reporter: Eugene Zuspann Esq. CG - Hypo #1 1. Originally, the clients were the deceased and the surviving
spouse Hypo #2 1. Who is the Client? Mom Hypo #3 - Multi Jurisdictional Practice 1. Can you prepare the documents? Hypo #4 Choices The panel and the audience discussed the alternatives. Depending on the facts and further discussions with the spouse, the attorney (you) need to determine what is proper. Hypo #5 1. There needs to be a lot of care in this case. Hypo #6 ============================================================ Presenter: Carlyn S. McCaffrey Esq. Reporter: Herbert L. Braverman Esq.
GENERAL INFORMATION ABOUT INSTITUTE ______________________________________________________ To search the ABA-PTL archives online or manage your subscription,
go to http://mail.abanet.org/archives/aba-ptl.html
|
