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AMBRECHT & BRITTAIN, LLPGift Tax Returns
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I. Gift Tax Rule: Present Interest Gifts and the $10,000.00 Exclusion A. Transfers by a donor during life to any donee are subject to the gift tax rules. B. IRC Section 2503(b) "In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not...be included in the total amount of gifts made during such year..." II. Crummey Withdrawal Powers in Insurance Trusts A. Cash gifts to an insurance trust will not satisfy the present interest requirement unless the trust utilizes the Crummey type of withdrawal power. B. The use of the Crummey withdrawal power in an insurance trust will satisfy the present interest requirement for gift tax purposes. Therefore, if the gift to the insurance trust is less than the $10,000.00 exemption amount, no gift tax return is required to be filed. C. If the gift to the insurance trust exceeds the Crummey withdrawal right, then a gift tax return must be filed for the amount of the gift in excess of the exemption amount. The donor will have used part of his or her $600,000.00 exemption for the excess gift. III. The Generation-Skipping Tax ("GST") A. If a transfer is made to a person two or more generations from the transferor, then a generation-skipping event will occur. If a generation-skipping event occurs, then a flat 55% tax may be applicable to that event. For purposes of the GST, a "person" may be a trust. B. Review the insurance trust document. Do the generation-skipping tax rules apply to the trust? One of three situations will exist in the document: 1. The proceeds will be distributed only to the living children. The generation-skipping tax rules will not be applicable. 2. The trust is to stay in existence for the life of the children, they have no general power of appointment, then the assets pass to the grandchildren. Clearly, the generation-skipping tax rules will apply. 3. A grandchild may take a share should the child predecease the insured, otherwise the trust will be distributed to the child. This is a common drafting technique for insurance trusts. The generation-skipping tax rules will apply if a child does, in fact, predecease the insured but not if that does not occur. What do you do now? Suggestion: Ask, in writing, the lawyer who drafted the document. C. Gifts of $10,000.00 or less directly (i.e., a present interest gift) to a person two or more generations below that of the transferor will be exempt from GST purposes. [See section 2642(c)(1).] D. Does a Crummey withdrawal power in a trust give a donor the same exemption for GST purposes as for gift tax purposes? 1. NO! Section 2642(c)(2) provides that for gifts in trust for skip persons, the trust must have the following provisions: (A) during the life of such individual, no portion of the corpus or income of the trust may be distributed to...any person other than such individual, and (B) if the trust does not terminate before the individual dies, the assets of such trust will be includible in the gross estate of such individual. E. A trust with Crummey powers is not automatically exempt for GST purposes. The only way to provide that the trust will be exempt will be to allocate part of the transferor's GST exemption to the trust. 1. How do you allocate the transferor's GST exemption to the insurance trust? You must timely file a gift tax return, fill out Schedule C of form 709, and attach the NOTICE OF ALLOCATION to the return. (See form 709 instructions for details.) The amount of the GST exemption allocated should equal the amount of the gifts made to the trust during the year if you want to keep a zero inclusion ratio in the trust. In other words, the amount of the exemption allocated equals the amount of the gifts to the trust. On the death of the insured, the entire trust will be exempt from GST, notwithstanding the fact that trust principal has now increased to the insurance payoff amount. This is sometimes referred to as "leveraging the GST exemption." 2. What happens if you do not allocate the transferor's GST exemption? On the death of the insured, if the trust will (or may) be subject to GST, then the transferor's executor must allocate the decedent's GST exemption in an amount equal to the value of the trust at the moment of death, which then will include the proceeds of the insurance policy. If the insurance exceeds the GST exemption, then unnecessary GST will be incurred!! 3. Special rules for late allocations. There are special rules for the allocation of the GST exemption if the gift tax return is not filed on time. See the regulations for details. F. Reg. Section 26.2652-1(a)(5), Example 5 reviews the special rules dealing with withdrawal powers in excess of the 5/5 powers. In short, for GST purposes, the withdrawal power should not exceed the 5/5 lapse provisions of section 2041(b)(2), otherwise the power holder will be deemed a transferor for the excess amount for GST.
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