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A Sequel Much Worse Than the Original: Planning for GST Tax on Nonexempt Trusts

Jan 22, 2020

Presented by M. Read Moore, McDermott Will & Emery LLP

M. Read Moore discussed planning for the generation skipping transfer (“GST”) tax on nonexempt trusts. A nonexempt trust is a trust with an inclusion ratio greater than zero (typically, trusts that are either partly or fully subject to the GST tax). He started off by discussing the history of the GST exemption and how it has increased over the years. In 2020, it is $11.58 million. All those increases in the GST exemption had no effect on nonexempt trusts previously created.

Mr. Moore emphasized throughout his discussion that the GST tax is different from the estate and gift tax. Furthermore, it has only been around for 35 years. Although there is authority on how to make trusts exempt and preserve exemption, there is very little guidance and not a lot of regulation regarding nonexempt trusts and the potential tax issues related to them. In contrast, the estate and gift tax have been around for a hundred years, give or take, and there is lots of authority with respect to them and the related income tax area.

Mr. Moore’s presentation started off with an explanation of the how the GST tax applies to taxable terminations and taxable distributions, and described each; he also included some of the key differences between the estate and gift tax and the GST tax. Specifically, the GST tax applies to the value of the trust property triggering the GST event, but there are no rules that define value for this purpose. Presumably, this should be determined using the same valuation principles that apply to the estate and gift tax. A lot of the Chapter 14 gift tax valuation rules don’t apply for GST purposes; IRC Secs. 2701, 2702, and 2704(a) are not applicable. In addition, while IRC Sec. 6166 is not available to help finance the tax, it may be possible to get a payment extension under IRC Sec. 6161. Finally, Mr. Moore concluded with planning options for dealing with the anticipated GST tax on nonexempt trusts.

He divided the planning options for anticipated GST tax into three categories: those available to a (1) transferor, (2) beneficiary and (3) trustee. A transferor’s options include making a late allocation of GST exemption, allocating GST exemption at the end of an ETIP, and applying for 9100 relief to retroactively allocate GST exemption to transfers to a trust. A beneficiary’s options include exercising a limited power of appointment in favor of non-skip persons, lengthening the trust’s term or adding non-skip persons as trust beneficiaries, and triggering gift or estate tax with respect to the trust assets. Finally, a trustee’s options include making distributions to non-skip persons, paying for the health and education expenses of skip persons, permitting skip persons to use trust property, decanting the trust to eliminate or postpone the GST tax, and entering into discount planning and freeze transactions with trust assets.

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Karen L. Goldberg

Karen L. Goldberg Partner-in-Charge of the National Tax Trusts and Estates practice, within the Private Client Services Group. She specializes in estate planning for closely held business owners, senior corporate executives and other high net worth individuals.

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