Griff's Notes, April 14, 2022: Keeping GST Exemption Allocations Consistent

Tax, trusts and estates updates from around the country

For those individuals who do not extend their returns, this has been a busy week for tax preparers. In my practice, I just got through my first wave of gift tax returns. Each time I conduct this exercise, I am reminded of key lessons for practitioners. For a more basic review, I have linked some old videos below, but they have valuable lessons on how a previously-filed transfer tax returns can affect liability for generation-skipping transfer (GST) tax.

First, over a year ago, I walked through the basics of the GST tax and reverse QTIP election for marital trusts. This can be especially important for estate plans which rely on a portability election, since the unused GST exemption cannot be preserved through a portability election. Thus, applying the deceased spouse’s GST exemption to the elected portion of any QTIP trust is paramount.

Of course, this may be dependent on whether a decedent’s GST exemption has been properly allocated on a 706, even if the 706 is only filed for portability purposes or to make the QTIP election to begin with. I run into a number of such returns where the preparer simply does not prepare Schedule R to allocate GST exemption, and even an occasional return which lacks a QTIP or reverse QTIP election for a marital trust (which is a mistake when a marital deduction is actually claimed elsewhere on the return). Automatic allocation works differently at death than it does for lifetime gifts, and I explain why in this video:

There are many lessons which can be learned the hard way from gift and estate tax returns as pertains to the GST tax. The Code and Treasury Regulations have attempted to limit GST tax errors through automatic allocation, but given the sheer amount of Private Letter Rulings in this area, you can see that taxpayers frequently have to correct errors for which the time for amendment or streamlined relief has passed.

Even some of the long-held dogma around the GST exemption is now coming into question. Practitioners are increasingly split on whether it is a good idea to elect out of automatic allocation of GST tax. Crummey rights and defined-value clauses can create landmines in the allocation process, especially given the number of Crummey rights which are not drafted to qualify for the GST tax annual exclusion. Any gift of an asset subject to an appraisal, if its gift tax value is subsequently adjusted, can create issues with prior manual allocations of GST tax exemption. Gift-splitting elections can also cause issues, as seen with PLR 201811002.

I have no convenient conclusion to button up this article, other than the importance of checking and re-checking transfer tax returns. It is easy to not see the forest for the trees when you focus solely on the gift and estate tax liabilities reported on Forms 709 and 706.