Is there a GST tax on this?

[Tackslawyer]

If a non GST exempt trust is created by grandparent, and the non GST exempt trust buys grandchild's home from grandchild, but then lets grandchild live in home rent-free, is this subject to GST tax?

Grandchild, along with child, are permissible income beneficiaries of the trust.

[Bees Knees]

The three things you have to answer are:

1) Was there a gift?

2) Was it to a skip person?

3) Does the trust qualify for the GST exemption?

I think number 2 is easy assuming mom or dad are both alive. A gift to a grandchild is a gift to a skip person when there is someone in the in-between generation still alive.

Number 1 depends. Rather than confuse the issue with the Generation Skipping Transfer tax, simply ask yourself, if I let my grandchild live in my house rent free, is that a gift? The only thing the GST issue does is create a second set of rules for taxing the gift and any related exemption.

Number 3 depends on the trust. A gift through a trust may or may not be subject to gift tax, depending on whether the grantor still controls that which has been gifted.

[Tackslawyer]

The three things you have to answer are:

1) Was there a gift?

2) Was it to a skip person?

3) Does the trust qualify for the GST exemption?

I think number 2 is easy assuming mom or dad are both alive. A gift to a grandchild is a gift to a skip person when there is someone in the in-between generation still alive.

Number 1 depends. Rather than confuse the issue with the Generation Skipping Transfer tax, simply ask yourself, if I let my grandchild live in my house rent free, is that a gift? The only thing the GST issue does is create a second set of rules for taxing the gift and any related exemption.

Number 3 depends on the trust. A gift through a trust may or may not be subject to gift tax, depending on whether the grantor still controls that which has been gifted.

1) Was there a gift? I don't know. Is it a gift to a beneficiary if the beneficiary is entitled to income from the trust? I think the question should be, was there a "distribution" and if so, was it a taxable distribution under the GST rules? I don't know the answer to this, which is why I asked.

2) The grandchild is a skip person, if the transferor was the grandparent. I think its clear the transfer, if any occurred, was not from the parent, because the parent doesn't own the property, the parent is also a mere beneficiary of such property.

3) The question stated that it was a non-exempt trust, which means transfers from the trust to skip persons would be subject to GST tax.

Regarding the statement about the parents living as a requirement for having a skip person, I believe the parents can be deceased now and the grandchild could still be a skip person. The test is whether the parent "predeceased" the transferor.

If a client comes to you and says their grandson lives in their home, do you tell them to file a gift tax return?

I think its clear that the value of the foregone rental income is not imputed to the grandson. But that's the income tax law, not the transfer tax law. Sometimes the two do not mesh (see also, defective grantor trusts).

[Bees Knees]

1) Was there a gift? I don't know. Is it a gift to a beneficiary if the beneficiary is entitled to income from the trust? I think the question should be, was there a "distribution" and if so, was it a taxable distribution under the GST rules? I don't know the answer to this, which is why I asked.

And my point is you are complicating the issue by acting like gifts under the GST rules are somehow different than normal gifts. They are not. The only difference is GST applies to skip persons.

Ignore GST for a moment and ask yourself if it is simply a gift.

TTB, page 21-24 says:

“Trusts. A transfer to an irrevocable trust is a completed gift if
the donor retains no power over the assets. A transfer to a revocable
trust that allows the donor to take back the property is not
a completed gift. For situations in the middle—the donor retains
some power over the trust but not a right to fully reclaim the assets—
the facts in the particular case determine whether a gift has
been completed or partially completed. See Regulation Sections
25.2511-1 and 25.2511-2 for examples.”

In other words, it depends on whether this trust is a revocable or irrevocable trust. If the beneficiary is merely getting income from the trust, but the grantor still maintains control, its not a gift until the beneficiary actually irrevocably receives something, such as each time income is actually distributed. If it is an irrevocable trust where the grantor can’t take anything back, one beneficiary gets remainder interest and another gets income for life, then you have all kinds of complicated calculations to try to figure out just who got what irrevocably. You have to try to figure out what the present value of a future benefit is.

I suggest you contact an estate attorney for this. Present and future valuations for estate and gift tax are not something tax preparers are qualified to do.

[Tackslawyer]

The grandparent is dead. I'm not sure you can ignore GST since a dead person cannot make a gift.

I appreciate your time - you could have said nothing at all but you at least tried to help, and I am truly grateful.

Just out of curiousity, if a grandparent comes to you and says they let their grandchild live in their home, would you tell them to file a gift tax return?

And my point is you are complicating the issue by acting like gifts under the GST rules are somehow different than normal gifts. They are not. The only difference is GST applies to skip persons.

Ignore GST for a moment and ask yourself if it is simply a gift.

TTB, page 21-24 says:

“Trusts. A transfer to an irrevocable trust is a completed gift if
the donor retains no power over the assets. A transfer to a revocable
trust that allows the donor to take back the property is not
a completed gift. For situations in the middle—the donor retains
some power over the trust but not a right to fully reclaim the assets—
the facts in the particular case determine whether a gift has
been completed or partially completed. See Regulation Sections
25.2511-1 and 25.2511-2 for examples.”

In other words, it depends on whether this trust is a revocable or irrevocable trust. If the beneficiary is merely getting income from the trust, but the grantor still maintains control, its not a gift until the beneficiary actually irrevocably receives something, such as each time income is actually distributed. If it is an irrevocable trust where the grantor can’t take anything back, one beneficiary gets remainder interest and another gets income for life, then you have all kinds of complicated calculations to try to figure out just who got what irrevocably. You have to try to figure out what the present value of a future benefit is.

I suggest you contact an estate attorney for this. Present and future valuations for estate and gift tax are not something tax preparers are qualified to do.

[Bees Knees]

Just out of curiousity, if a grandparent comes to you and says they let their grandchild live in their home, would you tell them to file a gift tax return?

Since I am not required to give estate and gift tax advice while preparing a 1040 return, I would not tell them anything about estate or gift taxes. Just like I am not required to prescribe a medical treatment for the rash on their arm.