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The Teenaged Tax Comes of Age. Fran M. DeMaris Executive Vice President Cannon Financial Institute, Inc. Generation Skipping Transfer Tax Learning Map. What is GSTT?. A Transfer Tax similar to Gift and Estate tax

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The teenaged tax comes of age l.jpg

The Teenaged Tax Comes of Age

Fran M. DeMaris

Executive Vice President

Cannon Financial Institute, Inc.


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Generation Skipping

Transfer Tax

Learning Map


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What is GSTT?

  • A Transfer Tax similar to Gift and Estate tax

  • Applies when assets are transferred two or more generations below the transferor

  • Not unified with Gift and Estate Tax

  • Imposed at the maximum estate tax rate (45% in 2008)


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GSTT Exemption and Rates

YearExemptionGST Tax Rate

2001$1,060,00055%

2002$1,100,00050%

2003$1,120,00049%

2004$1,500,00048%

2005$1,500,00047%

2006$2,000,00046%

2007$2,000,00045%

2008$2,000,00045%

2009$3,500,00045%

2010N/A (Estate & GST Tax Repealed)

2011+$1,000,000 (plus indexing)55%


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Why GSTT Is Important

  • Not Widely, Well Understood

  • Millions of Millionaires

  • Unintentional skips

  • Many Existing Plans Were Created Prior To Enactment Of GSTT


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Two Options

Parent

Estate/Gift

$2,000,000

41-45%

Estate/Gift

$ 2,000,000

41-45%

Child

Estate/Gift

$ 2,000,000

41-45%

GSTT

$ 2,000,000

45%

Grandchild


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Effective Dates - When Does GSTT Apply?

  • When a generation is “skipped”

  • When, in a trust or similar arrangement, interests pass down multiple generations without Estate or Gift tax vesting in each generation

  • When a trust has NO GPOA to a beneficiary

  • All transfers after 10/22/86 and lifetime transfers after 9/25/85 are subject to GSTT


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When Does GSTT Not Apply

  • When trust contains a GPOA to each generation

  • When grandfathering rules apply:

    • Lifetime transfers (gifts) before 9/26/85

    • Intervivos irrevocable trusts created before 9/26/85

    • Testamentary irrevocable trusts before 10/22/86

    • Decedents with revocable plans who have been incompetent from 10/22/86 until death


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Generation Assignment


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Generation Assignment Rules

Family

  • Family members assigned by relationship

  • Non-family members assigned by relative age to transferor

  • Determines relative generation to transferor

Non-Family

Skip/Non-skip


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Family Members

  • Family Members are assigned generations based on relationship to the transferor

  • Spouse is in transferor’s generation

  • Adopted children fall into appropriate generation

  • Family tree used is from transferor’s grandparents down


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“Family Members”

Grandparents

Parents

Uncle/Aunt

Spouse

Brother/Sister

First Cousin

Transferor

Adopted Child

Child

Niece/Nephew

Once Removed

Great- Niece/Nephew

Grandchild

Grandchild

Twice Removed

Great-grandchild

Great-grandchild

Etc.

Etc.


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Pre-deceased Ancestor Rule

  • When a child predeceases the transfer, the more remote descendants all ‘step-up’ a generation

  • Applies to issue only, unless transferor has no issue. Then to niece/nephew, etc.

Spouse

Transferor

Child

Adopted Child

Grandchild

Grandchild

Great-grandchild

Great-grandchild


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Pre-deceased Ancestor RuleResults of predeceased child

Spouse

Transferor

Brother/Sister

Adopted Child

Niece/Nephew

Grandchild

Great Niece/Nephew

Grandchild

Great-grandchild

Etc.

Great-grandchild


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Non-Family Members

  • Age difference determines “generation”

  • Each generation deemed to be 25 years

  • Transferor deemed to be in middle of his/her generation, thus 12½ years to end of transferor’s generation

  • 12½ + 25 = 37½ years

  • Transfer to non-family member who is

    37½ years younger than transferor is a skip


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“Skip Person”

Family member two or more generations below transferor

Non-family member 37½ years younger than transferor

Trust with only skip person beneficiaries

“Non-skip Person”

Family member within two generations of transferor

Non-family member with age within 37½ years of transferor

Trust with any non-skip person beneficiary

Generation AssignmentPutting It All Together


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Types Of Skips


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Direct

Skip takes place when transfer becomes irrevocable

GSTT due at same time Gift or Estate tax applies

Direct Skip

Indirect

Skip might or will take place in the future

Gift or Estate tax due on initial transfer

GSTT due in future at occurrence of a taxable event

Taxable Distribution

Taxable Termination

Types of Skips


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Parent

Child

Direct Skip

  • A lifetime or testamentary transfer to a skip person in which only skip person(s) have an interest

  • Transferor pays the tax

  • Tax reporting is on Form 709 or 706

Grandchild


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Parent

Trust fbo

Child

Taxable Distribution

  • Distribution of funds to a skip person from a trust that has non-skip beneficiaries also

  • Recipient skip person pays the tax (may also carry out DNI)

  • Tax reporting on Form 706 GS(D) filed by recipient and 706 GS(D)-1 filed by trustee

Distribution

Grandchild


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Parent

Trust fbo

Child

Taxable Termination

  • Termination of the interest of the last non-skip person beneficiary

  • Trustee pays the tax

  • Tax reporting on Form 706 GS(T) filed by trustee

Child's interest terminates

Grandchild


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Exemption & Exclusions


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Exclusions and Exemption

  • Annual Exclusion

  • Unlimited tuition & medical expense exclusion

  • GSTT Exemption

    ($2,000,000 in 2008)


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Annual Exclusion

  • Similar to Gift Tax Annual Exclusion

  • Applies to outright direct skips and direct skips to a special trust

    • Income or corpus can be distributed only to the person benefited by the gift, and

    • The trust must be includible in the person’s estate at death [IRC 2642 (c)]

  • Beware the application to Crummey trusts


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Gift Tax Annual Exclusion

(Present Interest)

Outright

Simple Trust

Minor’s Trust

Crummey Powers

GSTT Annual Exclusion

(Non-taxable direct skip)

Outright Direct Skip

Direct Skip to “Special Trust”

One current beneficiary

Includible in his/her estate

Different Rules for Gift &GSTT


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Exclusion for Qualified Transfers

  • Direct payment to the service provider of tuition and medical expenses is exempt (as for Gift Tax)

  • Unlimited amount

  • No relationship need exist

  • Applies to donor or distribution from a trust

  • §2611(b)(1)

Law Degree

John Q. Public


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$$$

GSTT Exemption

  • $2,000,000 (Indexed starting in 1999)

  • Changed in 2004 to new phased in UCEEA

  • 2008 Exemption is $2,000,000

  • Allocated by transferor or personal representative on Gift or Estate tax return

  • Irrevocable election

  • Retroactive allocation allowed for unnatural order of death

  • If not allocated, deemed allocation applies


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1986-1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

$1,000,000

$1,010,000

$1,030,000

$1,060,000

$1,100,000

$1,120,000

$1,500,000

$1,500,000

$2,000,000

$2,000,000

GSTT Exemption in Past Years


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Allocation of the Exemption


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Inclusion Ratio

  • Determines the amount (ratio) of the transfer subject to (inclusion) GSTT

  • Applies at time of direct skip or for the life of the arrangement for an irrevocable trust

  • Can be adjusted for later transfers


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Always, Always, Always split trusts to achieve a zero inclusion ratio!!!

Did I mention

"always?"


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Why Split Trusts?

  • To achieve zero inclusion ratio accounts

  • Optimizes use of the generation skipping transfer tax exemption

  • Fund can then be used for alternate purposes, have different distribution terms or be distributed last to non-skip persons

  • Can optimize tax allocation clauses

  • Provides specific fund to use for direct skips


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Split Trusts, How?

  • Formula in document

  • Power to split

    • In document

    • Under state law

  • Qualified Severance


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Qualified Severance

  • The division of a single trust and the creation of two or more trusts if:

    • The single trust was divided on a fractional basis, and

    • The terms of the new trusts, in the aggregate, provide for the same succession of interests of beneficiaries as in the original

  • Trustee may elect to sever a trust at any time


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QTIP for Gift/Estate Tax

Qualifies for marital deduction only if elected

Treats spouse as transferor even though spouse has no GPOA

Reverse QTIP for GSTT

Does not affect estate tax marital deduction achieved by QTIP election

Treats decedent as transferor even though assets are included in survivor’s estate

Enables optimum use of GSTT exemption

“Reverse QTIP” ElectionAn election to determine transferor


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Standard GST Estate Plan

Surviving Spouse may assign GSTT exemption to his/her assets and second marital trust

Will or Revocable Living Trust

Credit Shelter Trust Zero Inclusion Ratio

Reverse QTIP Zero Inclusion Ratio

Second Marital or Survivor’s Trust


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