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Estate Tax Lawyers Push IRS to Clarify Automatic Allocation of GST Rules

By Diane Freda
Publication Date: 03/17/2011

With the April 18 deadline for filing some 2010 Form 709 returns looming, estate tax attorneys have asked the Treasury Department to issue formal guidance that will clarify that there will be no automatic allocation of the generation-skipping transfer tax (GST tax) exemption where there can be no benefit.

The 2010 Tax Relief Act changed the GST tax rules, reinstating the GST tax, but assigning it a zero percent tax rate.

Transferors who make outright direct skips or direct skips to trusts that have no GST potential may not be aware of the automatic allocation issue, practitioners said. They may find themselves squandering their GST allocation by failing to elect out of automatic allocation.

“There is an automatic allocation rule that would apply to transfers to grandchildren that would suck up GST exemption and even waste it,” Carol Harrington, a partner with McDermott, Will & Emery, told BNA March 16.

“In the past, if you made a gift to a trust that benefitted more than just grandchildren, and included more remote descendents, you may or may not have wanted exemption,” said Ellen Harrison, partner with Pillsbury Law. However, those rules worked better when there was an affirmative tax rate, she said. “With a tax rate of zero, the assumptions on which rules in Chapter 13 were based don't work properly,” she added.

It is unclear whether transferors who make a direct skip in 2010 will have to make the election out of the automatic allocation of GST exemption by the gift tax return due date of April 18, (which can be extended until Oct. 15), or if they automatically have until Sept. 19 to file the gift tax form, she said.

If no guidance is issued before April 18, the best course of action is to either file a gift tax return by April 18 or extend the income tax return, which automatically extends the gift tax return until Oct. 15, Harrington said.

The complete text of this article can be found in the BNA Daily Tax Report, March 17, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2011, The Bureau of National Affairs, Inc.