Finding information on proper GST tax treatment is tricky, so I feel like I need confirmation that I know what I am talking about here. This post is long, but only because I am justifying the information here so I can track my thinking in case I really miss something.
BACKGROUND: There is an irrevocable trust created by grandma fro the benefit of her grandchildren (GC) in 2001. All GC and the GCs' issue are permissible current recipients of income or principal in the sole discretion of the trustee. The GCs have a right of withdrawal to qualify the transfers for the annual exclusion (but not the GST automatic inclusion ratio of zero for non-taxable gifts under section 2642(c)). The trust terminates when the last GC turns 25 and then whatever is in the trust is distributed outright to the GCs and the issue of deceased GCs.
ISSUE: To me, this arrangement has all three types of GST transfers, but I want to make sure this is correct.
DIRECT SKIP: The initial transfer from Grandma to the trust is a direct skip because the trust is a skip person via section 2613(a)(2) and the gift is subject to gift tax, even if none was paid under the annual exclusion. All the interests are held by skip persons per reg 26.2612(e) because only skip persons are permissible recipients of income/principal. The transfer will use Grandma's GST exemption since the transfers do not qualify for the automatic GST inclusion ratio of zero per section 2642(c) of the code. Unless Grandma deems otherwise, the transfer automatically uses her GST exemption under section 2632(b). Am I getting that right?
TAXABLE DISTRIBUTIONS: Additionally, future distributions from the trust are now governed by section 2653 of the tax code. The transfer was a GST transfer and immediately thereafter the property is held in trust. Distributions from the trust to the GCs no longer have GST implications because the transferor is now deemed to reside in the generation directly above the GCs via section 2653. Distributions to the issue of the GCs, however, would be taxable distributions because the distributions are not direct skips (or are they?) nor are they taxable terminations. Is this correct? Or would another section of the code prevent this from occurring? I don’t think 2611(b)(2) works because the transferee in the prior transfer is in a generation above the transferee in this transfer.
TAXABLE TERMINATION: Additionally, when the trust separates when the youngest living GC reaches 25, a taxable termination may occur. If a GC of grandma dies after grandma but before the trust terminates and leaves issue, I think a taxable termination will occur. Under Section 2612(a)(1) at the trust's separation, an interest in property held in trust ends and only a skip person holds an interest in that property and a distributions is being made to a skip person. There is no new transferor in this situation either, so the transferor would still be considered to reside in the generation directly above the GC and the issue of the GCs are two generations below that. Once again, am I getting that right?
RETURNS: Though I think it will be difficult for grandma to use her entire GST exemption giving these gifts, GST tax returns are still going to be needed for this trust if distributions are made to the issue of the GCs or perhaps at termination, even if the inclusion ratio is 0. Is that also correct?
Thanks,
UnderpaidGSTman
BACKGROUND: There is an irrevocable trust created by grandma fro the benefit of her grandchildren (GC) in 2001. All GC and the GCs' issue are permissible current recipients of income or principal in the sole discretion of the trustee. The GCs have a right of withdrawal to qualify the transfers for the annual exclusion (but not the GST automatic inclusion ratio of zero for non-taxable gifts under section 2642(c)). The trust terminates when the last GC turns 25 and then whatever is in the trust is distributed outright to the GCs and the issue of deceased GCs.
ISSUE: To me, this arrangement has all three types of GST transfers, but I want to make sure this is correct.
DIRECT SKIP: The initial transfer from Grandma to the trust is a direct skip because the trust is a skip person via section 2613(a)(2) and the gift is subject to gift tax, even if none was paid under the annual exclusion. All the interests are held by skip persons per reg 26.2612(e) because only skip persons are permissible recipients of income/principal. The transfer will use Grandma's GST exemption since the transfers do not qualify for the automatic GST inclusion ratio of zero per section 2642(c) of the code. Unless Grandma deems otherwise, the transfer automatically uses her GST exemption under section 2632(b). Am I getting that right?
TAXABLE DISTRIBUTIONS: Additionally, future distributions from the trust are now governed by section 2653 of the tax code. The transfer was a GST transfer and immediately thereafter the property is held in trust. Distributions from the trust to the GCs no longer have GST implications because the transferor is now deemed to reside in the generation directly above the GCs via section 2653. Distributions to the issue of the GCs, however, would be taxable distributions because the distributions are not direct skips (or are they?) nor are they taxable terminations. Is this correct? Or would another section of the code prevent this from occurring? I don’t think 2611(b)(2) works because the transferee in the prior transfer is in a generation above the transferee in this transfer.
TAXABLE TERMINATION: Additionally, when the trust separates when the youngest living GC reaches 25, a taxable termination may occur. If a GC of grandma dies after grandma but before the trust terminates and leaves issue, I think a taxable termination will occur. Under Section 2612(a)(1) at the trust's separation, an interest in property held in trust ends and only a skip person holds an interest in that property and a distributions is being made to a skip person. There is no new transferor in this situation either, so the transferor would still be considered to reside in the generation directly above the GC and the issue of the GCs are two generations below that. Once again, am I getting that right?
RETURNS: Though I think it will be difficult for grandma to use her entire GST exemption giving these gifts, GST tax returns are still going to be needed for this trust if distributions are made to the issue of the GCs or perhaps at termination, even if the inclusion ratio is 0. Is that also correct?
Thanks,
UnderpaidGSTman