THE GENERATION-SKIPPING TRANSFER TAX: A …

1 The Blum Firm, Throckmorton Street, Suite 650, Fort Worth, Texas 76102 Attorneys at Law(817) 334-0066 fax (817) 334-0078 THE GENERATION-SKIPPING TRANSFER TAX:A USER S MANUALTHE SAN ANTONIOESTATE PLANNERS COUNCILDOCKET CALL IN PROBATE COURTESTATE PLANNING, PROBATE AND GUARDIANSHIP SEMINAR February 15-16, 2007 GARY V. POST 2007, The Blum Firm, V. POSTBIOGRAPHICAL INFORMATIONGARY V. POST is a partner in The Blum Firm, , a Fort Worth law firm. The firm,comprised of ten attorneys, specializes in the areas of estate planning and probate, asset protection,and business and tax planning.

2 Five of the ten attorneys are also Certified Public Accountants, sixare Board Certified by the Texas Board of Legal Specialization in Estate Planning and Probate Law,and one is Board Certified in Tax Post received his in 1983 from Southern Methodist University School of Law andhis (magna cum laude; Beta Alpha Psi) in 1980 from Texas A&M University. He is BoardCertified in Estate Planning and Probate Law by the Texas Board of Legal Specialization, and is afrequent speaker and author on estate planning and tax topics. Mr. Post volunteers with many civicorganizations and is currently serving on the Board of Directors for the Tarrant County Probate THE GENERATION-SKIPPING TRANSFER TAX:A USER S MANUALGARY V.

3 GENERATION-SKIPPING TRANSFER Tax ( GSTT ) is a TRANSFER Tax imposed on conveyancesthat skip a generation . A complete, practical understanding of the GSTT and all of its parts is a mustfor the tax practitioner to enable him or her to provide creative, successful planning for the clientand, perhaps more importantly, to prepare the practitioner to carry out planning and compliancefunctions while avoiding the traps and costly mistakes that await the unprepared. TAXESThe Federal TRANSFER Tax System includes three separate TRANSFER Taxes. Tax. The Gift Tax is a tax imposed on completed transfers during lifetime( gifts ).

4 The tax is computed with reference to the fair market value of the transferred property asof the date of the gift. Only taxable gifts are included in the gift tax base for purposes ofcomputing the gift tax. Certain gifts are not considered taxable gifts and are therefore excludedfrom the gift tax base. Tax Annual Exclusion Amount. The Gift Tax Annual Exclusionrepresents the amount any donor can give to any person in any year without being deemed to havemade a taxable gift. The Gift Tax Annual Exclusion is currently $12,000, but is subject to futureadjustment for inflation.

5 Only transfers that provide the donee with a present interest in the giftedproperty qualify for the Exclusion. Outright gifts automatically qualify for the Gift Tax Annual Exclusion. Giftsfor minors made to Uniform Gifts to Minors Act or Uniform Transfers to Minors Act accounts alsoqualify. Generally, gifts made in trust will qualify for the Exclusion if the recipienttrust qualifies as a 2503(c) Trust or if the trust dictates that the trustee must provide the beneficiarywith notice of the contribution and a right to withdraw it (at least to the extent of the Exclusionamount) for a reasonable period of time ( a Crummey withdraw right ).

6 A donor s taxable gift for a year to a donee is the amount by which theentire gift for that year exceeds the Gift Tax Annual Exclusion amount (if applicable).-2-Example: Mom gives each of Son and Daughter $5,000 in 2006 and makesno other gift to either child during the year. Mom has not made a taxable gift to either Son orDaughter because her gift to each ($5,000) is within her Annual Exclusion amount for each of themfor 2006 ($12,000). Example: Mom gives Son $15,000 in 2006 and makes no other gift to Sonduring the year. Mom has made a taxable gift to Son of $3,000, or $15,000 less the AnnualExclusion amount ($12,000).

7 Note: The IRS has taken the position that an outright gift of a limitedpartnership interest will only qualify for the gift tax annual exclusion if (1) the donee has theimmediate use, possession and enjoyment of the gifted limited partnership interest, (2) the donee hasthe ability to sell or assign the limited partnership interest at any time, and (3) the general partner isheld to fiduciary standards equivalent to those imposed on a trustee with discretionary distributionauthority. Tech. Adv. Mems. 9131006 (April 30, 1991); 199944003 (July 2, 1999).

8 The IRSposition has met with some approval by the Tax Court and the Seventh Circuit. Hackl v. Commr,118 TC 279 (2002), aff d, 335 F3d 664 (7 Cir. 2003). The IRS has ruled that a donee s ability tothsell a limited partnership interest subject to a right of first refusal qualifies as sufficient presentenjoyment of the partnership interest to qualify the gift for gift tax annual exclusion treatment. PrivLtr Rul. 9415007 (Jan. 12, 1994). and Medical Care Exclusions. A donor can pay any person s tuitionwithout having to (i) pay gift tax, (ii) use any exemptions or exclusions, or (iii) report the paymentson a Gift Tax return, provided payment is made directly to a qualified educational institution.

9 Roomand board, books, meals, etc. do not qualify for the tuition exclusion, nor do payments to the balletor piano teacher. A donor can also pay for any person s medical care without having to (i) paygift tax, (ii) use any exemptions or exclusions, or (iii) report the payments on a gift tax return,provided payment is made directly to the medical care provider. Expenses relating to prevention,diagnosis, treatment, cure, and alleviation are covered, as are certain necessary transportation andlodging expenses. Health insurance is also covered. Expenses relating to cosmetic surgery andexpenses reimbursed by medical insurance do not qualify for the medical care Tax Exemption.

10 The Gift Tax exemption represents the amount oftaxable gifts any donor can make over the course of his lifetime without having to pay Gift qualifying for the Annual Exclusion or the medical or tuition exclusions do not count towardsa donor s Gift Tax exemption amount. The Gift Tax exemption amount is $1,000,000. A donor will owe gift tax onlyif he makes more than $1,000,000 in total taxable gifts during life. -3-Example: Mom gives Son $15,000 in 2006 and makes no other gift to Sonduring the year. Mom has made a taxable gift to Son of $3,000, or $15,000 less the annual exclusionamount ($12,000).