GST tax exemption - late allocation issues.

• Author: Kelley, Duane G.
• Position: Generation-skipping transfer

Under the current generation-skipping transfer (GST) tax rules, each individual taxpayer is given a $1 million lifetime exemption to allocate against gifts made directly to persons more than one generation Younger than the donor (skip person) or to gifts in trust that may eventually be received by skip persons. The exemption can be allocated during the donor's lifetime on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, or at death on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

Allocation of GST Exemption

The allocation of the GST exemption to gifts made directly to a skip person is automatic and is required to be reported on the Form 709 reporting the gift in the year made. The donor, however, is allowed to make an election not to allocate the GST exemption to the gift and to pay the GST tax currently.

The allocation to gifts not made directly to a skip person (i.e., in trust) can be made: 1. At the time of the gift on a timely filed Form 709 for the year in which the gift was made; 2. On a notice of late allocation of GST exemption (notice) filed any time after the due date (including extensions) of the Form 709 for the year in which the gift was made; or 3. When there is a taxable distribution or termination of the trust received by a skip person.

Once a GST exemption allocation is made to a gift, it is irrevocable unless it is subsequently determined that the gift would have zero GST tax potential.

Late Notice of Allocation

The filling of a late notice of allocation of GST exemption usually occurs for one of two reasons. First, inadvertently, no GST exemption has been previously allocated to a trust with appreciable assets and one or more potential skip-person beneficiaries, in which there have been transfers made by gift in previous years. Second, intentionally, no GST exemption has been previously allocated to a trust with appreciable assets and one or more potential skip-person beneficiaries, in which there have been transfers made by gift in previous years.

Timing the Allocation

Timing the allocation of a taxpayer's GST exemption can be a valuable planning tool. With careful planning, the use of a taxpayer's lifetime exemption can be maximized for the benefit of the taxpayer and his heirs. Without proper planning, however, there are two pitfalls that can catch a taxpayer and his adviser by surprise. First, the exemption could be wasted on allocations to trusts that...