AICPA's legislative solution to the GST tax exemption allocation trap.

• Author: Sherr, Eileen Reichenberg
• Position: Generation skipping tax

In the August 1997 issue of The Tax Adviser ("Beware Not Allocating the GSTT Exemption on a Gift Tax Return--A Trap for the Unwary," pp. 514-516), the AICPA Tax Division's Trust, Estate and Gift Tax Committee first developed and reported on a legislative proposal to address the significant potential practitioner liability that accountants and other practitioners face, because of missed generation-skipping transfer (GST) tax exemption allocations on gift tax returns. Since that time, the proposal has been revised and enhanced by a multi-professional tax force that included members and committee chairs of the AICPA Trust, Estate and Gift Tax Committee, the American Bankers Association, the American College of Trust and Estate Counsel (ACTEC) and several bar associations, including the American Bar Association's Tax Section and Real Property, Probate and Trust Law Section.

The revised proposal provides an automatic allocation of the GST tax exemption, with an elect-out option (as in the original proposal), as well as Regs. Sec. 301.9100 relief and substantial compliance provisions for taxpayers who inadvertently miss the allocation but intended to apply it. The proposal would allow retroactive allocations when there has been an unnatural order of death and severing of trusts into exempt and nonexempt shares when appropriate.

Congress should enact this proposal to improve taxpayer fairness and equity as well as efficient administration of the tax system, and reduce serious problems confronting taxpayers and their advisers. Currently, missed allocations create significant potential GST tax, trapping both taxpayers and practitioners alike. Taxpayers and their families may not discover a missed allocation for many decades, at which point, the excessive GST tax liability that the family incurs may have also increased exponentially. Many practitioners consider gift tax return preparation to be too risky for the fees involved, because of these GST issues, thus possibly depriving taxpayers of reasonably priced professional advice. This can also seriously affect the IRS's administration abilities.

Background

A GST tax is imposed on transfers outright or in trust to beneficiaries more than one generation below the transferor's generation at the maximum gift and estate tax rate (currently 55%). To determine the rate applicable to a particular transfer, the 55% rate is multiplied by the inclusion ratio (a fraction based on the GST exemption amount allocated to the transfer). A trust with a zero inclusion ratio is exempt from GST tax. Every individual is allowed a $1 million GST tax exemption (indexed for inflation), which may be allocated to any property subject to estate or gift tax. Married couples may treat transfers as made one-half by each spouse, in effect giving them a combined $2 million GST tax exemption. If a GST exemption is allocated to a lifetime transfer to a trust on a...