Friday, June 3, 2011

Deemed Allocations Pose Danger in 2011

Tweet

One of the smarter features of the recent changes in 2010 Tax Relief Act was the decision to reinstate the generation-skipping transfer tax in 2010, but with a 0% tax rate for direct skips. While leaving undisturbed the 2010 tax holiday, the reinstatement of the GST tax structure removed the uncertainty created by outright repeal. This uncertainty included the inability to determine who was the transferor of a generation-skipping transfer in 2010, as well as to allocate GST exemption to 2010 transfers.

There is at least one thorn in this rose, however, and that is the interaction between the 0% tax rate and the deemed allocation rules. IRC §2632(b)(1) makes a deemed allocation of the transferor's unused GST exemption to any lifetime direct skip, whether to an individual or to a trust. Any transferor who made a direct skip in 2010 subject to the 0% tax rate must thus file a 2010 gift tax return to elect out of the deemed allocation. Failure to elect out will result in the allocation of exemption to a nontaxable transfer, not a desirable result.

Four leading practitioners (Carol A. Harrington, Carlyn S. McCaffrey, Ellen K. Harrison, and Pam H. Schneider) recently wrote to Treasury, pointing out that many advisors are unaware of the need to elect out of the deemed allocation for 2010. They asked that Treasury provide administrative relief for 2010, which would provide that any transferor who made a direct skip transfer to an individual or to a trust that has no post-2010 GST potential will be deemed to have elected out of the automatic allocation. This is a reasonable request that is within Treasury's power to implement.

Even if Treasury accedes to this request, advisors still need to be aware of which clients made direct skips in 2010, as each case should be examined to determine whether a non-allocation is appropriate.

Harold W. Pskowski, Managing Editor for Estates, Gifts, and Trusts

All BNA publications are subscription-based and require an account. If you are a subscriber to the BNA publication and signed-in, you will automatically have access to the story. If you are not a subscriber, you will need to sign-up for a trial subscription.