ANCHORAGE ESTATE
PLANNING COUNCIL
SEPTEMBER 24, 2012
Gifting Updates and
GST Planning
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Susan Behlke Foley
Bhree Roumagoux
© Shaftel Law Offices, P.C. & Foley & Foley, P.C. 2012
All Rights Reserved
VALUE DEFINITION CLAUSES
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A value definition clause uses a fractional formula approach to
implement a gift or sale. These types of transfers are often used in
conjunction with an escrow trust and an intentionally defective grantor
trust, typically an Alaska SSDS perpetual trust.
There is developing case law supporting such clauses. The Estate of
Christensen v. Commissioner, 130 T.C. 1 (2008), aff’d, 586 F.3d 1061 (8th
Cir. 2009), upheld the use of a “defined value” type of clause in a
disclaimer situation. In Petter v. C.I.R., T.C. Mem. 2009-280, aff’d, 653
F.3d 1019 (9th Cir. 2011), the full Tax Court upheld the use of a defined
value clause in gift and sale transactions. In Hendrix v. Commissioner,
101 T.C.M. (CCH) 1642 (2011), the Tax Court upheld the use of a defined
value clause to divide stock between trusts for descendants and a donor
advised fund.
The above cases all involved plans where any excess amount would be
distributed to a charity.
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2012 UPDATE
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However, in March of this year, in Wandry v.
Commissioner, T.C. Mem. 2012-88, the Tax Court
upheld the use of a defined value clause where
the excess amount was returned to the donor.
The IRS has filed a Notice of Appeal. If they
proceed with the appeal, the case will be heard in
the 10th Circuit.
Excellent case summary by Steve Akers at
Bessemer Trust.
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“THE GREENBOOK”
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TREASURY’S PROPOSALS. In February 2012, the Department of Treasury issued its General
Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals (the “Greenbook”). The
estate and gift tax proposals include the following items that we have seen before:

APPLICABLE EXCLUSION AND GST EXEMPTION. The Administration proposes that both of
these amounts be $3,500,000, the same as the amount that applied during 2009.
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GIFT TAX EXCLUSION AMOUNT. However, only $1,000,000 of the above $3,500,000 could be
used during lifetime as tax-free gifts. This is dramatically different from the $5,120,000
amount allowed during 2012.
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TAX RATE. The top tax rate would be 45% as compared to the 2012 top rate of 35%.
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PERPETUAL TRUST. The generation-skipping transfer tax exempt status of a trust, resulting
from an allocation of GST exemption to the trust, would only last for 90 years. After that
time, the trust would not be exempt from generation-skipping transfers in the future. That
is, if distributions then were made to grandchildren or further generations, those
distributions would be taxable. The GST tax rate is the same as the maximum estate tax
rate (45%).

VALUATION DISCOUNT. Transfers of interests in a family-controlled entity such as a limited
partnership, limited liability company, or closely held corporation, to a member of the family
will no longer qualify for valuation discount. As stated above, these discounts often run in the
20% to 40% range.
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GRAT. This proposal requires that a GRAT have a minimum duration of ten years. In order
to get the benefits of a GRAT, the grantor has to live during the entire fixed term of the
GRAT. For this reason, many GRATs have been designed to last relatively short periods of
time, for example, two years or five years. By requiring that a GRAT last for at least ten
years, the Treasury Department is creating more of a risk that the grantor will die during the
fixed term of the GRAT, and therefore will not achieve the exclusion of the GRAT’s remaining
assets from the federal estate tax.
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NEW TO GREENBOOK IN 2012
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P. 83 - GRANTOR TRUST. This proposal provides that if a trust is a grantor
trust, then the assets in the trust would be included in the grantor’s estate at
death for estate tax purposes. Further, distributions from the trust during the
grantor’s lifetime would be treated as taxable gifts by the grantor. Also, if the
grantor trust status ends, then all of the assets in the trust will be treated as a
gift by the grantor.
•
This proposal is designed to end the estate planning advantages of grantor
trusts.
•
As proposed, these rules would only apply to new trusts created after any date
of enactment. However, new contributions to pre-existing trusts could be
subject to these rules.
•
•
Link to Capital Letter No. 31 by Ronald D. Aucutt regarding this year’s
Greenbook: http://www.actec.org/public/CapitalLetter31.asp
Link to the Greenbook: http://www.treasury.gov/resource-center/taxpolicy/Documents/General-Explanations-FY2013.pdf
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ASSETS TO CONSIDER GIFTING
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Gift of promissory note from prior sale transaction
between a grantor and a grantor trust.
 Gift and/or forgiveness of debt won’t cause
income tax recognition.
 Best if there is a history of timely payments on
the promissory note before the gift is made.
Gift of income interest in a marital trust.
 Deemed gift of all of the assets under IRC
§ 2519.
 The value of the gift is determined under IRC
§ 2511.
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WHERE THE RUBBER MEETS THE ROAD:
GENERATION-SKIPPING TRANSFER TAXES IN
EVERYDAY ESTATE PLANNING DECISIONS
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HIGH NET WORTH CLIENTS
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Passing substantial wealth to the next generation
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Result:
Estate tax is an issue for client
 Estate tax likely to be an issue for next generation
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Use GST maximum available exemption
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CHILDREN WHO ARE WEALTHY
Parents who have less wealth
 Children who are independently wealthy
 Possibilities to Consider
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Lifetime gifts to Generation-Skipping Trusts to
benefit children, then grandchildren
Testamentary gifts to Generation-Skipping Trusts
to benefit children, then grandchildren
Lifetime gifts to grandchildren
Testamentary gifts to grandchildren
Disclaimer planning
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SPENDTHRIFT AND IRRESPONSIBLE CHILDREN
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Child who may waste and inheritance
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Spendthrift
Addictions
Inability to handle wealth due to mental health issues
Possibilities to consider
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Trust managed by third party trustee during child’s
lifetime.
Allocation of available GST Exemption to trust to
benefit grandchildren
Recognition that payment of Generation-Skipping
Tax or Charitable Split Interest Trust may be
preferable to inheritance by the child
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LIFETIME GIFTS: GST ANNUAL EXCLUSION
AND OTHER EXCLUSIONS FROM GST

Annual Exclusion 2012
$13,000 per donor, per recipient
 Spouses may elect joint gifts of $26,000, per recipient,
by filing of gift tax return (“gift splitting”)
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Additional gift types excluded from both GenerationSkipping Tax and Gift Tax
Qualified Tuition Gifts (MUST be paid directly to the
institution)
 Qualified medical expenses
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WAYS TO USE GST EXCLUSIONS
DURING LIFETIME
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Special Needs Trust for Grandchild: Indirect
benefit to the grandchild’s parent?
Gifts to Section 529 College Savings Plans
Direct Payment of Tuition by Payment to the
Educational Institution
Direct Payment of Medical Expenses not Covered
by Insurance
Gifts to Irrevocable Trusts ONLY under Limited
Circumstances
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GST BASICS
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Transferors
Person disposing of property
 Person holding taxable power of appointment
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Donee may exercise in favor of donee, donee’s creditors,
donee’s estate, or creditors of donee’s estate.
Calculating Generations
Generation assignment based on reality-relatives of
transferor or transferor’s spouse
 Generation assignment based on 25-year generations
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GENERATION ASSIGNMENT
Non-Skip Persons: Transferor’s Generation and
One Generation Below
 Skip Persons: Grandchildren’s Generation and
Unrelated Persons 37.5-62.5 years younger than
transferor
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Exception: Predeceased Ancestor Rule
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(IRC Section 2651(e))
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TAXABLE TRANSFERS
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Direct Skip
Date of Transfer determines due date for return
 Tax Exclusive (Tax paid by transferor, in addition to
amount of transfer)
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Taxable Termination
Date of termination determines due date for return
 Tax Inclusive (Tax paid indirectly by transferee, out
of the transfer)
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Taxable Distribution
Date of termination determines due date for return
 Tax Inclusive (Tax paid indirectly by transferee, out
of the transfer)
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CALCULATING GST TAX
GST Tax = Taxable Amount x Applicable Rate
 Applicable Rate = Maximum Federal Estate Tax
Rate x Inclusion Ratio
 Inclusion Ratio = 1 – Applicable Fraction
 Applicable Fraction:

GST Exemption allocated to transaction
fair market value of property
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USE A PERPETUAL TRUST!
The Current GST
Exemption: $5.12 million
If the GST Exemption Sunsets: The generationskipping exemption generally tracks the $1,000,000
applicable exclusion, but it is subject to an inflation
adjustment. Therefore, the 2013 GST exemption
will be approximately $1,430,000. Any GST
transfer amount above that would be subject to a
55% tax.
If GST exemption is allocated to an Alaska
SSDS Perpetual Trust, the assets can transfer
to each successive generation gift, estate and
generation-skipping tax free. Additional
planning techniques can help leverage the
assets in the trust.
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CAUTION
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GST exemption used is not always equal to
gift/estate tax exemption used.
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Annual exclusion does not apply to indirect skips
(I.R.C. § 2642(c)) .
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You can end up using GST exemption when you make
annual exclusion gifts to an irrevocable trust.
GST doesn’t apply to outright gifts to non-skip
beneficiary.
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You may have additional GST exemption you can allocate
even when all of the gift tax credit has been used.
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LIT EXAMPLE OF 2642(C) DISCREPANCY
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1990-2000 gifts of $10,000 each
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2001-2011 gifts of $10,000 each
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$220,000 of annual exclusion gifts = NO GIFT
TAX CREDIT USED
$110,000 of annual exclusion gifts with
automatic/opt-in allocation of GST exemption
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INCLUSION RATIO
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Inclusion ration of 1
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Inclusion ratio of 0
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All distributions to a skip person will be subject to
GST tax
Exempt from GST tax when assets go out of the trust
to a skip generation
Mixed inclusion ratio
Between 0 and 1
 Distributions to a skip person will be partially
exempt from GST taxes (fractional amount based
on trust’s inclusion ratio)
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LATE ALLOCATION OF GST EXEMPTION
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Allocate GST Exemption to a trust that isn’t
exempt (or completely exempt) but that might go
to a skip generation.
File a Form 709 using the current value of the
trust assets.
We could do this for our example LIT (it has a
mixed inclusion ratio).
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QUALIFIED SEVERANCE
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Mixed inclusion ratio trust
•
Divide into an exempt and non exempt trust
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•
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Exempt = 0
Non-exempt = 1
IRC § 2642(a)(3) and Reg. 26.2642-6
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Need authorization pursuant to state statute and/or trust
document.
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AS 13.36.169(b)
Terms of the trusts have to be substantially identical to the
terms of the original trust.
• Transfer the assets out of the old trust into the two new trusts
within 90 days of the qualified severance.
• The severance is based on the value of the assets at the time of
the severance. This will likely require a valuation of the trust
assets at the time of the severance.
• Report the qualified severance on a 706-GS(T)
•
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Adequate disclosure to trigger the three year statute of limitations.
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GST EXEMPTION ALLOCATION TO ETIP
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ETIP = Estate Tax Inclusion Period
GRATs
• QPRTs
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You can’t allocate GST exemption to assets in a GRAT
or QPRT until the term has expired because of the
possibility of reversion (assets being included in the
grantor’s estate if they die during the term.)
If the ETIP period expires this year, you can allocate
GST exemption to the trust assets.
File a Form 709 solely to report the GST allocated to
the assets subject to the ETIP.
•
Review the Form 709 instructions (page 3).
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GST IN THE FUTURE
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If the credit decreases, clients may end up with
no more GST exemption available to them for
future transfers.
No direct skip gifts above the annual exclusion
amount unless clients are willing to pay GST tax.
 If they are making annual exclusion gifts to an
indirect skip trust, additional contributions will end
up being non-exempt.
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Plan to avoid mixed inclusion ratio.
 Set up a non-exempt trust.
 Plan to avoid this altogether.
 Gift sufficient assets this year.
 Loan funds to the exempt trust.
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