TC upholds GSTT Regs.

• Author: Ransome, Justin P.
• Position: Tax Court, generation-skipping transfer tax

In Estate of Gerson, 127 TC No. 11 (10/24/06), the Tax Court held that the exercise of a testamentary general power of appointment (GPA) by a decedent in favor of her grandchildren was subject to generation-skipping transfer tax (GSTT). In so holding, it ruled that Regs. Sec. 26.2601-1(b) (1)(i) was a reasonable interpretation of the grandfathering provision contained in Section 1433 (b)(2)(A) of the Tax Reform Act of 1986 (TRA '86).

Facts

In Gerson, the decedent's husband had created a revocable trust that became irrevocable on his death. On his death, the trust agreement provided that the trust was to be divided into three separate trusts. One was a marital trust for the decedent's benefit; the trust agreement provided for the distribution of income and principal to the decedent during her life and granted her a GPA at death. The decedent's husband died on July 22, 1973. The decedent died on Oct. 20, 2000, and exercised her GPA in favor of a trust for the benefit of her grandchildren and more remote descendents.

The decedent's estate included the corpus of the marital trust under Sec. 2041 (regarding the inclusion in a decedent's gross estate of property over which he or she had a GPA). The estate, however, did not list this property as subject to GSTT, taking the position that such property was transferred under a grandfathered GSTT-exempt trust pursuant to TRA '86 Section 1433(b)(2)(A). Attached to the Federal estate tax return was Form 8275-R, Regulation Disclosure Statement, in which the estate took the position that Regs. Sec. 26.2601-1(b)(1)(i) was an invalid attempt by Treasury to rewrite TRA '86 Section 1433(b)(2)(A).

Service's Stance

The IRS took the position that the marital trust property subject to the decedent's GPA was not exempt from GSTT under Regs. Sec. 26.2601-1(b) (1)(i); thus, it assessed a GSTT deficiency of $1,144,465, arguing that the exercise of the decedent's GPA in favor of a trust for the benefit of her grandchildren and more remote descendents was a "direct skip" under Sec. 2612(c) for GSTT purposes.

Law

Under TRA '86 Section 1433(a), GSTT generally applies to all GSTs made after Oct. 22, 1986 (the date the TRA '86 was enacted).TRA '86 Section 1433(b)(2), however, exempts transfers by certain trusts from GSTT. A trust exempt under TRA '86 Section 1433(b)(2) is often referred to as an "exempt trust" or a "grandfathered trust"; specifically, the GSTT does not apply to any:

1. Transfer from a trust that was...