Sec. 2632 prop. regs. on electing out of deemed GST allocations.

• Author: Leggiero, Heather J.
• Position: Generation skipping tax

The Economic Growth and Tax Relief Reconciliation Act. of 2001 amended Sec. 2632 to allow for deemed allocations of certain lifetime transfers to generation-skipping transfer (GST) trusts. Proposed regulations issued on July 13, 2004 (REG-153841-02) address how to elect out of these deemed allocations.

Background

The deemed-allocation rules applicable to indirect skips were designed to simplify the process, by removing the affirmative election to allocate the GST tax exemption, especially in instances in which the allocation was intended to be made, but inadvertently omitted. For indirect skips made during life after 2000, the transferors GST tax allocation is automatically applied as of the date of the transfer (for transfers subject to an estate tax inclusion period, as of the close of such period).

However, there are several instances in which a transferor would not want to allocate his or her GST exemption. For example, a transferor may (1) want to conserve it for other gifts; or (2) not want to allocate when the gift is made to an irrevocable life insurance trust to purchase term life insurance (for details, see Hills, Tax Clinic, "Wait and See GST Tax Planning" TTA, September 2003, p. 527), or when the gift's value has decreased after the transfer, but before the gift tax return is filed.

Definitions

Which transfers are subject to the Sec. 2632(c) deemed-allocation rules? Indirect skips made during the transferor's life qualify. Sec. 2632(c)(3)(A) defines an indirect skip as any transfer of property, other than a direct skip, that is subject to gift tax and made to a GST trust. Sec. 2632(c)(3)(B) defines a GST trust as a trust that could have a GST with respect to the transferor; it also details several types of trusts that are not GST masts.

Prop. Regs.

Prop. Regs. Sec. 26.2632-1 (b)(2) and (3) address three separate elections that can be made--to elect to (1) not have the automatic allocation rules apply to current transfers to the trust; (2) not have the automatic allocation rules apply to both current and future transfers to the trust; and (3) treat any trust as a GST mast (and, thus, subject to the deemed-allocation rules).

Making the election: Each election is made by attaching a statement to a timely filed Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, that identifies the trust and describes the transfer. If the transferor is electing out under #1 or #2 above, the statement must specifically provide...