Gift tax return filing traps and opportunities.

• Author: Nager, Ross W.

When reviewing 1994 gift tax return filing requirements, practitioners should be aware of the traps and opportunities that may be present.

GST annual exclusion

Most gifts in trust do not qualify for the generation-skipping tax (GST) annual exclusion. The reason is that so-called Crummey withdrawal powers are no longer effective for GST purposes, even though they continue to qualify transfers for the gift tax annual exclusion. Therefore, if trust property may one day benefit grandchildren or more remote descendants, it may be advisable to allocate a portion of the donor's $1 million GST exemption to avoid future GST liability.

Although gifts to most trusts are susceptible, irrevocable life insurance trusts are most frequently affected. Practitioners should consider that their clients may incorrectly think premium payments and other below-$10,000 gifts to trusts are not taxable, particularly for trusts created before the Crummey repeal's Mar. 31, 1988 effective date. Note also that gifts and trust property passing to individuals more than 37 1/2 years younger than the donor may be subject to GST, regardless of family relationship (Sec. 2651).

Minimizing use of the GST exemption

Extending the gift tax return provides an opportunity to minimize the amount of GST exemption needed to cover a gift.

* If the exemption is allocated in a timely filed gift tax return (including extensions) for the year of transfer, the exemption utilization is based on the date-of-gift value. Therefore, if the property (including income) increases in value from gift date to extended due date, the return is filed timely and the exemption is used based on date-of-gift value.

* If the exemption is allocated after the due date (as extended), the exemption must be applied based on the filing-date value. Therefore, if the property value (including income) declines between the gift date and the extended due date, the GST exemption allocation is filed immediately after the extended due date. Note that this GST strategy does not alter the timing of any required gift tax payment or the need for filing a timely return for other purposes.

Using this strategy may require some complex calculations and, potentially, two filings (a timely gift tax return and a "late" allocation election). Therefore, it typically is considered only when the total amount of generation-skipping gifts is significant.

Special disclosure and election requirements

Special disclosure requirements apply to...