Author: Tara Halbert

The Generation-Skipping Transfer (“GST”) tax is designed to prevent taxpayers from avoiding estate tax on a child’s inheritance at the child’s death by “skipping” inheritances over children to grandchildren. Each person currently has a lifetime GST exemption amount of $11,400,000 (in 2019, and indexed for inflation). If you make a transfer during lifetime or at death to a grandchild or later descendant in excess of your unused GST exemption amount GST tax is imposed at a rate of 40% on the transfer. The application of the GST tax rules are fairly straightforward when making outright gifts but can become tricky when making gifts to a trust.

Prior to 2001, if you made a gift to a trust with multi-generational beneficiaries (i.e., children and grandchildren), you had to file a gift tax return and affirmatively allocate GST tax exemption to the trust to make the trust GST exempt. In 2001 the GST tax automatic allocation rules were changed so that trusts for the benefit of children and grandchildren could qualify for automatic allocation of GST tax exemption if the trust meets certain criteria and is a “GST Trust” as defined in the Internal Revenue Code. The use of GST tax exemption via automatic allocation reduces your lifetime GST tax exemption dollar for dollar but does not require a gift tax return to be filed to report the allocation of GST tax exemption to a trust.

If you decide to rely on automatic allocation of GST exemption when making gifts to a trust in lieu of filing a gift tax return it is important to keep a record of the amount of GST tax exemption automatically allocated to the trust so that you (and your tax preparers) know how much GST tax exemption you have remaining to use during life and at death. This could be accomplished by having your tax preparer prepare a simple memo to the file listing gifts and GST exemption used each year. This is particularly important if an asset appreciates significantly following the gift because you want to have a clear record of the amount of GST tax exemption that was allocated as of the date of the gift (v. the much higher appreciated value). If a clear record of automatic allocation of GST tax exemption cannot be established you could be forced to make a late allocation of GST exemption to the trust at the current appreciated value of the trust and “waste” a significant amount of GST tax exemption by allocating to the appreciated value. For more information please contact Tara Halbert in the Lexington, Kentucky office at 859-899-8711.

If you made gifts in 2018 now is the time to begin thinking about filing a gift tax return. If you made gifts in 2018 in excess of the gift tax annual exclusion amount ($15,000 per donee in 2018, or $30,000 if a husband and wife elect to split gifts and a gift tax return is required to make this election), you must file a gift tax return and apply your lifetime gift tax exemption to report these gifts. For gifts made in 2018 each person has a gift tax exemption of $11,180,000, reduced by the value of any prior lifetime gifts. Any gifts made in excess of the lifetime gift tax exemption are taxable at a rate of 40%. A gift tax return to report gifts made in 2018 is due on April 15, 2019, and may be extended until October 15,2019.

If you made a gift to a trust that has the potential to distribute property to a grandchild or later descendant, it is important to file a gift tax return to have a clear record of the Generation-Skipping Transfer (GST) tax exemption allocated to the trust. If a person relies on automatic allocation of GST exemption instead of filing a gift tax return it can be confusing at a later date to determine if a trust is GST exempt, so filing a gift tax return to affirmatively allocate GST exemption is a better practice even if automatic allocation may apply.

For more information please contact Tara Halbert in the Lexington, Kentucky office at 859-899-8711.