The Multi-Professional Organization Allocation Task Force (which includes members of the AICPA, the American Bankers Association, the American College of Trust and Estate Counsel and several bar associations) recently submitted a proposal to Congress advocating changes in the application of the generation-skipping transfer (GST) tax exemption.
The proposed changes would help taxpayers and their advisers fully make use of the GST exemption.
In the proposal we are trying to increase fairness and equity by simplifying what is an extremely complex area of the law, said Lloyd Leva Plaine, a partner at the law firm of Sutherland, Asbill & Brennan LLP, Washington, D.C., and a member of the task force.
People are trying to use the $1 million generation-skipping transfer exemption that they are allowed by law, she said, but the usage is being unnecessarily restricted by the complexity of the exemption allocation rules.
The GST tax, enacted by Congress in 1986, imposes the maximum gift and estate tax rate (55%) on transfers to beneficiaries more than one generation removed from that of the benefactor. The law, however, allows every individual a $1 million GST exemption. The exemption may be allocated to any property subject to estate or gift tax.
The GST exemption is automatically allocated in direct gifts from grandparents to grandchildren, unless the transfer is made through a trust, in which case the exemption must be elected.
In most cases people just miss the allocation, said John H. Gardner, chairman of the AICPA trust, estate and gift tax committee.
By the time the missed allocation is discovered, he added, a $1 million transfer may have ballooned into $5 million. At that point, the entire gift trust would be subject to the maximum gift and estate tax rate.
(Note: Examples of how the GST tax might be applied can be found in the AICPAs Legislative Solution to the GST Tax Exemption Allocation Trap, Tax Adviser , August 1998 .)
When taxpayers realize they might have avoided additional tax liabilities by making the allocation, they may sue their tax advisers for failing to instruct them to do so.
Small accounting firms, big accounting firms, law firms and/or anyone who files gift tax returns potentially could be sued over this, said Eileen Sherr, technical manager in the AICPA taxation division.
The task force proposal attempts to remedy the GST tax-exemption dilemma through the following recommendations:
- Extending the automatic exemption allocation rule to GST-type trusts.
- Providing statutory authority for the IRS to grant 9100 relief to taxpayers for late allocation.
- Confirming that substantial compliance provisions cover allocations evident from the return and other documents.
- Extending the predeceased parent exception to provide for retroactive allocation of the GST exemption for unnatural order of death when the transferor is still alive.
- Providing a trust-severance rule to cover various situations, including unexpected order of death and when there is an inclusion ratio between zero and one.
This proposal would extend the automatic allocation of the GST exemption to trusts and situations where one rationally would want it to be made, making the GST exemption more user-friendly and more accessible to taxpayers, Plaine said.