The attached summary provides a refresher on the Generation Skipping Tax (“GST”) tax rules and highlights often overlooked filing requirements when a trust either terminates or makes a non-terminating distribution to a skip person.
The GST tax consequences of outright gifts to a skip person is fairly straight forward and no tax is due as long as the amount of the gift does not exceed the donor’s GST exemption. In contrast, gifts in trust require a thorough analysis of the GST automatic allocation rules enacted in 2001 to ensure that a taxpayer’s exemption is allocated in the most tax-advantageous manner. Unfortunately, there are several situations where reliance on the GST automatic allocation rules can lead to undesirable results. To the extent that GST exemption is not allocated automatically or affirmatively, a GST tax could be triggered later when skip persons ultimately receive distributions or are the only beneficiaries of such trust.
Forms 709, 706 GS(D), 706 GS(D-1) and 706 GS(T) are due on the 15th day of the fourth month following the year the transfer, termination or distribution occurs (normally April 15th for calendar year taxpayers, or October 15th upon extension). Transfers at death are reported on Form 706, which is due nine months after death plus extensions. The IRS is generally permitted to challenge a trust’s GST inclusion ratio and assess GST tax and penalties until the later of: (i) the expiration of the statute of limitations for filing Forms 706 GS(T), 706 GS(D-1), or 706 GS(D) as a result of a taxable termination or distribution, or (ii) upon the expiration of the statute of limitations period applicable to the grantor/decedent’s Form 706 Estate Tax Return.
Given the complexity of the GST tax rules, we recommend that a taxpayer make a conscious decision with respect to any gifts in trust with an affirmative allocation of GST exemption and not rely on the GST automatic allocation rules. We also recommend that a Trustee consider the statute of limitations with respect to the GST inclusion ratio of a trust. Depending on historical gifts and tax filings, the Trustee may want to consider making a distribution to a skip person soon after the grantor’s death and file the respective tax filings to run the statute of limitations with respect to the GST inclusion ratio of such trust.
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