Minimizing the generation-skipping transfer tax with thoughtful use of the $1 million GST exemption.

• Author: Taylor, Rick J.

The generation-skipping transfer tax (GSTT) may apply to certain transfers - at rates up to 55% - in addition to gift tax, and even in situations in which a gift tax exemption exists. One tax-saving grace of the GSTT is that each individual has a $1 million generation-skipping tax (GST) exemption that allows him to Transfer up to $1 million of property and any future appreciation on the property) free from GSTT. Using the GST exemption presents complexities as well as tax planning opportunities. The planning ideas discussed here focus on using the GST exemption in connection with a transfer to an irrevocable life insurance trust.

Generally, the GSTT applies when property is transferred and is received by a "skip person," either as a direct transfer, by termination of someone else's interest in the property or by distribution from a trust. Generally, a "skip person" is an individual more than one generation below the transferor (e.g., a grandchild). A trust is a skip person if (1) all trust beneficiaries who can presently receive distributions from the trust are skip persons or (2) no individual has a present right to receive distributions from the trust and future distributions may be made only to skip persons.

The $1 million GST exemption may be allocated by the transferor or the transferor's executor at any time on or before the due date for filing the transferor's Federal estate tax return (including extensions actually granted).

Any available GST exemption is automatically allocated to lifetime "direct skips," unless the transferor elects out of the automatic allocation (Sec. 2632(b)). A "direct skip" is a transfer of property to a skip person that is subject to Federal estate or gift tax. A direct skip may be a direct transfer from the transferor to an individual or it may be a transfer to or from a trust.

Prop. Regs. Sec. 26.2632-1(b)(1) provides that the election out of the automatic allocation must be made on a timely filed Form 709, United States Gift (and Generation-Skipping Transfer) Tax

Return; once made, it is irrevocable. Allocations of GST exemption to lifetime transfers that are not direct skips are also made on Form 709. An allocation on a timely filed Form 709 (or an automatic allocation) is effective from the date of the transfer to which it relates. An allocation on a latefiled Form 709 is effective on the date the Form 709 is filed (or if filed by the donor's executor, on the date of the donor's death) (Prop. Regs. Sec...