CHAPTER 13 Generation Skipping Transfers

Transcription

1 CHAPTER 13 Generation Skipping Transfers DISCUSSION QUESTIONS 1. Define skip person. A natural person two or more generations younger than the transferor is a skip person. A trust is a skip person if all interests in the trust are held by skip persons, or no person holds an interest in the trust and at no time after the transfer may a distribution be made to a non-skip person. 2. To which type of transfers does the GSTT apply? The GSTT applies to direct skips, taxable distributions, and taxable terminations. 3. Who is liable for the GSTT on a direct skip? The transferor is liable for the GSTT on a direct skip from an individual. The trustee is liable for the GSTT on a direct skip from a trust. 4. Define taxable distribution. A taxable distribution is defined as any distribution from a trust to a skip person other than a taxable termination or a direct skip. Distributions of income or principal from a trust to a skip person that are not taxable terminations or direct skips are taxable distributions. 5. Who is liable for the GSTT on a taxable distribution? The transferee is liable for the GSTT on a taxable distribution. As a result, if any GSTT is paid by the trust, another taxable distribution occurs. 6. List the characteristics of a termination of an interest in property held in trust that does not create a taxable termination. When at the termination, the transfer is subject to federal estate or gift tax. When at the termination, a non-skip person has an interest in the property. When at the termination, it can be determined that no distribution may be made at any time to a skip person. DISCUSSION QUESTIONS 143

2 7. Who is liable for the GSTT on a taxable termination? The trustee of the terminating trust is liable for the GSTT on a taxable termination. 8. What is the GSTT rate? The GSTT is a flat tax equal to the maximum estate tax rate in effect at the time of the GST. For 2014, the rate is 40%. 9. How much can an individual transfer to a skip person during his lifetime, or at his death, without incurring any GSTT? An individual can transfer $14,000 for 2014 per year, per transferee without incurring any GSTT. In addition to the annual exclusion, an individual can transfer $5,340,000 for 2014 to a skip person without incurring any GSTT. 10. When must the allocation of the GST exemption take place? An individual may allocate his GST exemption at any time from the date of the transfer through the date for filing the individual s federal estate tax return. If no estate tax return is required to be filed, the GST exemption may be allocated at any time through the date a federal estate tax return would be due if a return were required to be filed. 11. Explain the predeceased ancestor exception. If a child of the transferor is deceased at the time of the transfer, that child s descendents are moved up one generation for purposes of determining whether the transfer constitutes a GST. As a result, a grandchild would be considered a child for GST purposes. 12. What is a qualified transfer and what are its GSTT implications? A qualified transfer is the payment of tuition to a qualified educational organization or the payment of qualified medical expenses to a medical care provider on behalf of a skip person. Qualified transfers are not subject to the GSTT and do not deplete the annual exclusion or GST exemption. 13. What is the estate tax inclusion period? The estate tax inclusion period is the period during which, should the transferor or the transferor s spouse die, the value of the transferred property would be included in the gross estate of the transferor or the transferor s spouse. 14. How are lifetime direct skips reported to the IRS? Lifetime direct skips are reported on Form 709, the gift tax return. 15. What are the benefits of using a generation-skipping trust? Use of a generation-skipping trust allows the planner to split the legal ownership of assets from the use of assets. If the beneficiaries do not have legal title to the trust assets when they die, the beneficiary cannot transfer anything in the trust at his death, and therefore no part of the trust may be included in the beneficiary s gross estate. 16. What is the Uniform Statutory Rule Against Perpetuities? The USRAP states that an interest in trust will be valid if it will vest or terminate within lives in being plus 21 years, or the interest actually vests within 90 years of the creation of the trust. The USRAP is a uniform set of rules adopted by many states to follow the Rule Against Perpetuities. 144 CHAPTER 13: GENERATION-SKIPPING TRANSFERS

3 17. Who pays the income tax on the income generated within a dynasty trust? To the extent the income of a dynasty trust is not distributed, the trust pays the income tax. On the income distributed, the beneficiary pays the income tax on the income. 18. Why should a dynasty trust give some beneficiaries a limited power of appointment? Certain beneficiaries may be given a limited power of appointment to change some of the trust provisions because laws may change or the need for the trust may be completely eliminated. DISCUSSION QUESTIONS 145

4 MULTIPLE-CHOICE PROBLEMS 1. To which of the following transfers does the GSTT not apply? a. A taxable termination. b. A taxable distribution. c. A direct skip. d. A skip-over. The correct answer is d. A skip-over does not exist. GSTT applies to the three other listed options. 2. Robin transfers $14,000 to her son, Gerry; $40,000 to her niece, Bernadette; and pays Hollowpoint Medical Hospital $50,000 for her granddaughter, Jill s, medical expenses. Which of these transfers is subject to GSTT? a. None of the listed transfers will be subject to GSTT. b. The transfer to Jill. c. The transfers to Bernadette and Jill. d. The transfers to Bernadette, Gerry, and Jill. The correct answer is a. None of the transfers will be subject to GSTT. The transfers to Gerry and Bernadette are not subject to GSTT because Gerry and Bernadette are non-skip persons. The payment to Hollowpoint Medical Hospital is not subject to GSTT because it is a qualified transfer paid directly to the medical institution. 3. Amy, a 46-year-old divorced mother of 3, has owned her own automotive repair center for 15 years. She would like to provide income to her assistant, JoAnn, and her other friends. Amy established a trust naming JoAnn, age 67, as the initial income beneficiary for her life. At JoAnn s death, Walt, a 59-yearold mechanic who has worked for Amy, will receive the income for the remainder of his lifetime. At Walt s death, the remainder interest will be divided equally between Amy s sons, Paul, John, and Donald. When will this trust be subjected to GSTT? a. At the date of creation of the trust. b. At JoAnn s death. c. At Walt s death. d. Never. The correct answer is d. The trust will not be subjected to the GSTT because the stranger beneficiaries are older than the trust settlor, and the remainder beneficiaries are the first generation below the settlor. Thus, no beneficiary is a skip person. 146 CHAPTER 13: GENERATION-SKIPPING TRANSFERS

5 4. Mel has never made any gifts subject to GSTT. He is single and would like to transfer as much as he possibly can during the year to his grandchild without triggering any GSTT. How much can Mel transfer to his grandchild this year and meet his goal? a. $14,000. b. $2,081,800. c. $5,340,000. d. $5,354,000. The correct answer is d. Mel can transfer an amount up to the GST exemption, $5,340,000 and the annual exclusion for the year, $14,000. Utilizing both exclusions, Mel can transfer $5,354,000 for 2014 without being subject to the GSTT. 5. David, age 78, retired from his 40-year career at BBB Corporation last year. As part of an overall estate plan, David has begun establishing many different trusts. Of the following list of beneficiaries listed in David s trusts, who would be a skip person for purposes of the GSTT? a. Jenna, age 31, David s wife. b. Tiffany, age 22, David s girlfriend. c. Peter, age 25, David s grandson, whose mother is living, but whose father, (David s son) is deceased. d. Bill, David s 81-year-old lifelong neighbor. Because Tiffany is technically a stranger and is more than 37.5 years younger than David, she is a skip person. Jenna is not a skip person because a spouse is always deemed to be in the transferor s generation. Peter is not a skip person because of the predeceased ancestor rule. Bill is not a skip person because he is older than David. 6. Which of the following statements concerning the GSTT is not correct? a. Each individual can exclude up to $5,340,000 of transfers from GSTT. b. The GSTT is applied to a gift after the application of the annual exclusion. c. Gifts that are subject to GSTT can be split. d. The GSTT only applies to transfers in trust. The correct answer is d. The GSTT applies to the transfer of any property to a skip person or an interest in trust for the benefit of a skip person. All of the other statements are true. 7. Many grandparents name their grandchildren as the beneficiaries of their life insurance policies. How should the life insurance policies for the benefit of grandchildren be held? a. A revocable life insurance trust should be established and funded with a transfer of the life insurance policy. b. The grandparent should be the owner with the grandchild as the listed beneficiary. c. An irrevocable life insurance trust should be created for the benefit of the grandchild. d. The ownership of the policy should be transferred to the grandchild. The correct answer is c. MULTIPLE-CHOICE PROBLEMS 147

6 The policy should be transferred to an ILIT with the grandchild listed as the beneficiary. Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent s life. Answer a is incorrect because a revocable trust would still cause inclusion in the grandparent s gross estate and possible GSTT consequences. Answer b is incorrect because if the grandparent owns the policy, the death benefit will be included in the grandparent s gross estate and still subject to GSTT. Answer d is incorrect because the grandchild should not own the life insurance policy outright since it would not place any limitations on the grandchild s ability to spend the funds. 8. Byron, age 65, gave $30,000 each to his son, his daughter, his six-year-old niece, his 21-year-old female neighbor, and his wife. Which of the transfers would be subject to GSTT? a. The transfer to his wife. b. The transfer to his neighbor. c. The transfer to his niece and the neighbor. d. The transfer to his niece, his neighbor, and his daughter. Only the transfer to his neighbor would be subject to GSTT. If the transferee is a stranger who is more than 37.5 years younger than the transferor, the transfer is subject to GSTT. All of the other transfers are transfers to relatives within one generation. A niece is only one generation below. 9. Justin transfers $2,000,000 in 2014 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Justin s child, Chip, and the trust principal is to be paid to Justin s grandchild, Beau. Justin allocates $800,000 of his GST exemption to the trust on a timely filed gift tax return. What is the GSTT rate applicable to the trust? a %. b %. c %. d %. The applicable fraction of the trust is 0.40 ($800,000 / $2,000,000) and the inclusion ratio is 1-40% = 60%. If the maximum federal transfer tax rate is 40% (in 2014), the GSTT rate applicable to the trust is 24% (0.40 x 0.60). 10. Upon what form is a lifetime GST reported? a. Form b. Form 709. c. Form 706. d. Form Any lifetime GST is reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax Return. 148 CHAPTER 13: GENERATION-SKIPPING TRANSFERS

7 11. Upon what form is a testamentary transfer subject to GSTT reported? a. Form b. Form 706. c. Form d. Form 709. Testamentary transfers subject to GSTT are reported on the Form 706, the United States Estate and Generation-Skipping Transfer Tax Return. 12. Which of the following statements regarding dynasty trusts is not true? a. A dynasty trust will not vest its ownership in each generation of beneficiaries. b. Alaska has laws that favor the creation of dynasty trusts. c. The income of a dynasty trust is always taxed at the trust level since ownership does not vest in the beneficiaries. d. A dynasty trust can give a beneficiary a limited power of appointment without causing inclusion of the trust s assets in the beneficiary s gross estate. The correct answer is c. The income of a dynasty trust is taxed at the trust level to the extent the income is not distributed to the beneficiary. The income that is distributed to the beneficiary is taxed to the beneficiary. All of the other statements are true. MULTIPLE-CHOICE PROBLEMS 149

8 150 CHAPTER 13: GENERATION-SKIPPING TRANSFERS