Navigating the revised gift tax return.

• Author: Smith, Blake T.

The 2003 Form 709, United States Gift and Generation-Skipping Transfer Tax Return, reflects changes to the generation-skipping transfer tax enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001. This article summarizes the changes and illustrates how to complete the revised schedules.

The recently released 2003 Form 709, United States Gift and Generation-Skipping Transfer Tax Return, contains several modifications to help implement the generation-skipping transfer (GST) tax changes enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The changes are designed to ease electing out of the automatic allocation of GST exemption and simplify tracking a donor's unused GST exemption.

In June 2002, the AICPA Tax Division's Trust, Estate, and Gift Tax Technical Resource Panel's Form 709 Task Force met with the IRS and submitted suggested changes to the form to take the new law into account. Many of the AICPA's suggestions have been included in the revisions to the 2003 Form 709.

Reporting GSTs on Form 709

Form 709 is used to compute the gift tax on lifetime transfers. It is also used to calculate the GST tax on lifetime direct-skip transfers and to allocate the donor's GST exemption to (1) such transfers and (2) transfers to trusts that may produce a taxable distribution or taxable termination.

Lifetime transfers subject to gift tax are reported on Form 709, Schedule A, Computation of Taxable Gifts. Schedule A has been overhauled to accommodate the deemed (automatic) allocation of GST exemption rules applicable to lifetime indirect skips. It now contains Part 3-Indirect Skips, for reporting lifetime indirect skips. In addition, split gifts made by a spouse are now reported separately on Part 1, Gifts Subject Only to Gift Tax; Part 2, Direct Skips; or Part 3, whichever is applicable, to facilitate electing out of the deemed-allocation rules on split gifts that are direct skips or indirect-skip transfers.

Split Gifts

Under Sec. 2513, spouses may elect to treat a gift made by one spouse to a third person as if the gift had been made one-half by each. Treating half of the gift as made by each spouse, regardless of who actually made the gift, allows use of the annual exclusion and applicable credit amount available to each spouse. In addition, because the gift tax rates are graduated, a split gift allows the total taxable gift to be taxed at each spouse's lower rate before either spouse moves on to the next bracket.

When a husband and wife elect gift-splitting for gift tax purposes, each spouse is also treated as the transferor of one-half of the gift for GST purposes, under Sec. 2652(a)(2). As a result, the deemed-allocation rules (which automatically allocate a transferor's GST exemption to direct skips and lifetime indirect-skip transfers) apply to split gift transfers as well. Thus, Schedule A is modified to allow the transferor to elect out of the deemed-allocation rules when they apply to split-gift transfers.

In prior years, sprit gifts were not reported separately on Schedule A; only the transferor's gifts were listed on Schedule A, Part 1 or 2. The total split gifts to be reported by the transferor's spouse were subtracted out when determining the transferor's taxable gifts for the year.

Similarly, the total split gifts attributable to the transferor's spouse were added to the reporting spouse's other gifts to arrive at taxable gifts for the year. Because the net split gifts were not listed separately, it was difficult to identify gifts subject only to the gift tax from those potentially subject to both gift and GST taxes. In turn, this made it difficult to identify (1) direct-split transfers subject to the deemed-GST-exemption-allocation rules, complicating the task of electing out and (2) other transfers that might warrant GST-exemption allocation, because they might produce a future taxable distribution or termination.

The inability to identify individual split gifts for purposes of electing out of the deemed-GST-exemption allocation was...