The Daily Tax Report extensively quotes Beth Shapiro Kaufman in their article "Allocation of Generation-Skipping Exemption To Prior Year Gift May Be OK, Attorneys Say." The full article is posted below with Ms. Kaufman's comments in bold. The article can also be accessed on the Daily Tax Report's website.
Now that Congress has made indexing permanent for exemption amounts related to the generation-skipping transfer tax, taxpayers may be able to take advantage of some increased exclusion amounts each year.
The problem is they may not know what to do with the extra amounts once they get them.
"Now that we have indexing for the GST exemption, everyone gets a new sliver of GST exemption each Jan. 1," Beth Kaufman, partner with Caplin & Drysdale, told Bloomberg BNA. "That opens up some opportunities for allocating GST exemption to existing trusts that are not completely exempt because the trusts were originally funded with more money than could be exempted," she said.
Though it is clearly acceptable for taxpayers to allocate additional GST exemption amounts to a gift from the prior year, Kaufman said the Internal Revenue Service hasn't made clear exactly how that is to be done.
Despite that, Kaufman said she believes that under existing IRS rules, taxpayers can make a timely allocation of the indexed 2014 exemption to a 2013 gift, as long as that allocation was made on a timely filed 2013 gift tax return.
Effective Date, What Value?
Much of the confusion about how to apply the exemptions has revolved around the date on which the allocation will be effective; and to what value the exemption must be applied.
The indexing is tied to the basic exclusion amount for estate tax purposes. That means that for 2013, taxpayers will have $5,250,000 of exemption from estate tax, for an increase of $130,000 from 2012, and for 2014 the exemption will be $5,340,000 for an increase of $90,000.
A client might want to take advantage of the extra exemption amount, for instance, if they made a gift to a dynastic trust on Dec. 27, 2013, and the gifted property is valued at $5,300,000. If the client has never used any GST exemption before, he or she will have $5,250,000 available on that date. If the client gets an extension on their gift tax return, they can make a timely allocation to that 2013 gift any time up until Oct. 15, 2014.
The client will need $50,000 of their 2014 additional GST exemption in order to completely cover the $5,300,000 gift. The question is whether he or she can make that allocation on a timely filed gift tax return for 2013, and, if so, when the $50,000 allocation will be effective. Another question is whether the valuation date of the trust assets is Dec. 27, 2013, the date the gift was made; Jan. 1, 2014, the first day on which the $50,000 of additional GST exemption became available; or the date the return making the allocation is filed, which is the rule for allocations made after the filing due date.
Kaufman argued for Jan. 1, 2014, as the effective date of the gift in this scenario, because she doesn't consider the allocation of additional GST tax due to indexing (on a timely filed return) to be a late allocation; and Jan. 1 is the only date for which there is statutory and regulatory support.
As for the value of the property, for a timely allocation of GST exemption, the property to which the allocation is made is valued on the date of the gift. However, Kaufman cautioned that the IRS might take issue with the use of that date for valuation of the assets and might instead take the position that their value on the effective date of the election—in this scenario Jan. 1, 2014 —should be used.
Whether the IRS considers the form to be filed late or not makes a difference in determining the valuation for a prior year gift to a trust. Late allocations generally apply the value of the property in trust on the date of allocation.
Desperate Need for Guidance
Pam Schneider, an attorney with Gadsden Schneider & Woodward LLP in Radnor, Pa., agreed that Jan. 1 would appear to be the most appropriate effective date, absent other guidance.
"There is a decent argument that as you read your way through the statute, it says you can use the additional GST tax exemption with an earlier allocation. The valuation date should be the date of the gift. But for the inflation adjustment, the effective date can't really be the date of the gift, so it should go back to as close as possible to the date of the gift, which would be Jan. 1," Schneider said.
If the IRS were to consider guidance, Schneider said, almost any rule they wrote would be valid because there are so many reasonable choices as to allocation dates.
"I would expect them to treat this as a late allocation that is filed timely. But until they do, they are timely allocations subject to those rules," she said.
She added that the law doesn't really contemplate this situation and practitioners desperately need someone to tell them what the rules are.
Kaufman also noted that this technique of applying exemptions to gifts only works for "indirect skips," which involve transfers that have intermediate steps before reaching a skip person. If the taxpayer made a gift through a direct skip—where property is transferred to someone a generation or two below the donor—such as a grandmother to a grandchild—the taxable event took place in 2013, and there was no way to save that by applying 2014 exemption to it.
To contact the reporter on this story: Diane Freda in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Brett Ferguson at email@example.com
Reproduced with permission from Daily Tax Report, 232 DTR G-2 (Dec. 3, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>