legal fees proves too much, and Tom dies. Tom’s children use a much older and wiser CPA who informs them of the consequences of the poor advice their father received, of lack of GST planning, and the tax, divorce, and liability protection that was all sacrificed. Tom’s children sue Tom’s CPA for poor advice. While there are some significant issues as to whether the CPA has any responsibility to the children for the poor 2012 planning advice, the claims and suits rage on. And the lawyer for Tom’s CPA and the lawyers for each of Tom’s children bill and bill, and it is they, not Tom’s heirs, who live happily ever after.
GST planning is so integral to 2012 gift transfers, and not only for mega-dollar-value gifts, that you should endeavor to incorporate the possible advantages of the GST planning opportunities available. The reality is that when considering GST planning, many taxpayers will be put off by the complexity and/or cost. But you should stop and consider how the benefits may dramatically outweigh the costs and other negatives.
A Bit of Background
The GST tax has existed since 1986. (There was an earlier version in effect from 1976 to 1986.) It was designed to prevent the wealthiest families from doing an end run around the estate tax. If an individual’s wealth was great enough, without the GST tax he or she could gift or bequeath assets in trust to two, three, and perhaps more generations “down the line” skipping the estate tax on intervening generations. To prevent the possible avoidance of the estate tax, the GST tax was enacted to apply when property transfers skip over a generation for estate tax purposes. Thus, the GST tax is a second layer of transfer tax applied to gifts and bequests that skip a generation. For example, the GST tax may apply if you make a gift to your grandchildren while your child (parent of the grandchildren) is still alive. A gift to a trust to benefit only grandchildren and later descendants could also trigger GST tax (if the trust is created while your child is alive). The planning is arcane and complex even for estate planning specialists; it is likely impenetrable for most taxpayers. But the high hanging fruit can often be the sweetest and worth the stretch to reach it.
GST Rules: Quick Overview
The following is a general background discussion of GST to establish the framework for the 2012 planning discussions that follow in several later chapters. While you might choose to skip the effort to understand GST planning, some sense of the tax and how planning for it commonly is approached will make some of the more dramatic planning recommendations for 2012 more understandable and, perhaps, even more palatable.
The GST tax can apply to a broad range of property transfers, including transfers of property in trust (e.g., a gift to a trust established for a grandchild), life estates (e.g., a child has the right to income from the property for life and on the child’s death a grandchild receives the property), remainder interests (e.g., a grandchild receives the property after the death of a child and the termination of the child’s life estate), and so forth. The real power, however, of GST planning is the allocation of the GST exemption to gifts made to perpetual, flexible trusts that benefit future generations in a manner that maximizes the leverage of assets transferred into the protective trust structure, and the duration for that trust.
For the GST tax to apply, a taxable event must occur. This requires a generation-skipping transfer. The simplest example is when you make a gift to a grandchild. In general, the tax is imposed whenever property passes to or for the benefit of a grandchild or more remote descendants, or to someone assigned to the generation of a grandchild or more remote descendants. It applies, in general, whenever property passes through the generation of children (e.g., a trust for a child which ends in favor of grandchildren) or around the generation of children (e.g., directly to a grandchild) if no estate or gift tax is imposed at the children’s generation. More technically, the GST tax applies when there is a transfer of property (or income from property) to a person who is, or is considered to be, a member of a generation at least two generations below that of the person making the gift. The term “person” in tax speak is broad and includes trusts as well—these people (individuals and trusts) are known as “skip persons” (explained in the next section).
Some basic definitions must be explained in order to understand the complicated GST tax. These include the three events that can cause the GST tax to apply. These events are a “direct skip,” a “taxable distribution,” and a “taxable termination.” These concepts all have applicability to 2012 planning.
Direct Skip
EXAMPLE: In 2012 you have not already used up all of your $5.12 million gift and GST exemption amounts. You may benefit most from shifting as much wealth as your remaining GST exemption will allow into a multi-generational GST exempt trust for the benefit of your children, grandchildren, and more remote descendants. This provides maximum flexibility. But if children, who are not skip persons, are included as beneficiaries, the trust involved is nota “skip person” and the gift to the trust is nota “direct skip.” If instead no children were included as beneficiaries in this trust, the trust itself will be a “skip person” and the gift to the trust will be a “direct skip.”
Some important definitions:
•A skip person is a person who is two or more generations below the generation of the person making the gift (e.g., a grandchild or a trust for the sole benefit of a grandchild). A trust is also considered a skip person when no distributions can be made currently to non-skip persons (e.g., children). This concept is critical to understanding 2012 tax planning since it may be essential for you to file a gift tax return and affirmatively allocate GST exemption to transfers made to many types of trusts that receive 2012 gift transfers (e.g., DAPTs, discussed in Chapter 5). A proper and timely allocation to your GST exemption on a federal gift tax return (Form 709) is often required to assure that the recipient trust is in fact GST exempt.
•Anon-skip person is a person who is less than two generations below the generation of the person making the gift (e.g., a child or sibling). In certain instances, the premature death of a child will allow the deceased child’s children to avoid treatment as a skip person (i.e., the deceased child’s children move up a generation for GST tax purposes). This means that transfers to such grandchildren won’t trigger the GST tax. A direct skip requires a transfer of an interest in property, which is subject to the estate or gift tax (even if protected by an exclusion or exemption from estate and gift tax), to a skip person. The person making the transfer pays the GST tax on a direct skip.
Once it has been determined that a gift is subject to the GST tax, the GST tax must be calculated. For GST tax purposes, a taxable transfer of property is generally valued at the time the generation-skipping transfer occurs and is based on the same valuation rules that apply to gifts.
PLANNING NOTE: Special rules apply when a late allocation of GST exemption is made, (e.g., GST exemption is allocated to a trust years after the initial gift transfer). This might have important planning applicability if you have to make a transfer to an existing insurance trust near the end of the year and there is insufficient time to create anew trust before year end. If a large gift is made to an existing insurance trust to which GST exemption was not previously allocated, then it may be wise to make a late allocation of GST exemption to that trust to exempt prior gifts from GST tax, in addition to allocating GST exemption to cover the 2012 gift. But the amount of GST exemption allocated must be equal to the current value
