THE GENERATION-SKIPPING TRANSFER TAX: A USER’S …

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. 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.

2 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. 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.

3 Tax. The Gift Tax is a tax imposed on completed transfers during lifetime( gifts ). 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. 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.

4 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 ). 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).

5 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). 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). The IRSposition has met with some approval by the Tax Court and the Seventh Circuit.

6 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. 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.

7 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. 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).

8 Mom must report her $3,000 taxable gift to Son and the corresponding use of$3,000 of her Gift Tax exemption amount on her 2006 Form 709, which will be due April 15, 2007,absent an extension. (Mom will actually report the entire $15,000 gift and indicate that $12,000 ofthe gift is offset by the Annual Exclusion amount.) Had she given Son only $12,000, she would nothave been required to report the $12,000 gift on a Form Tax Base and Gift Tax Calculation. The gift tax in any year is theexcess of (certain adjustments may be required if any GSTT has or will be imposed on Direct Skipsin the current or prior years or if the computation relates to gifts made after 2010. The applicabilityof those adjustments is beyond the scope of this presentation): tax calculated on the sum of all taxable gifts made during thereported year plus the value of all taxable gifts made in prior years(including taxable gifts made prior to 1977), tax calculated on the sum of all taxable gifts made in prior years(including taxable gifts made prior to 1977).

9 Tax Rates. The Gift Tax is imposed on cumulative lifetime taxabletransfers at graduated rates, which range from a rate of 18% (applicable to the first $10,000 intaxable value) to a current top rate of 45% (applicable for taxable value in excess of $2,000,000).Under current law, the highest marginal Gift Tax rate will be 45% for 2007 -2009, 35% in 2010, and return to 55% in 2011. Tax Return and Gift Tax Payment Due Dates. Taxable gifts in anyyear must be reported on a Form 709 filed by the donor by April 15 of the following year, unlessthan extension is granted. An automatic extension for filing the Form 709 (but not paying any GiftTax due) can be obtained by filing an extension for filing the donor s income tax return or by filinga Form 8892, Payment of Gift/GST Tax and/or Application for Extension of Time to File Form donor is responsible for any Gift Tax, which is due on April 15 of thethyear following the year in which the donor made the taxable gift that caused the Gift Tax to be the donor does not pay the tax due, the donee can be liable for payment.

10 If a donor dies before filing a Form 709 that is due, the executor of his estateis responsible for filing the Form 709 and paying any Gift Tax owing. The due date for the Form709 and payment of Gift Tax in that event will be the same due date (including extensions)applicable with respect to the donor s Estate Tax return if that date is sooner than the date the GiftTax return would otherwise be Tax. The Estate Tax is imposed on all transfers following the death of anindividual, including transfers through wills, life insurance policies, IRA s and retirement plans. Thetax is computed with reference to the fair market value of the property as of the date of Tax Base. The Estate Tax base includes the previously describedtransfers occurring at death less appropriate deductions (the taxable estate ) plus cumulative taxablegifts made by the decedent after 1976 that are not included in the decedent s gross estate ( adjustedtaxable gifts ).