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GST and Planned Giving - PGDC
GST and Planned Giving - PGDC
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There is also the "move up rule," which provides that at the time of any transfer to a skip person, if the parent of the skip
person (who is a descendant of the donor) is not living, then the transfer will not be deemed a direct skip because the skip
person is "moved up" to the generation of his or her deceased parent. [IRC 2612(c)(2)] The move-up rule does not apply if
the nonskip person is only deemed to have predeceased the transferor as a result of a qualified disclaimer.
Inclusion Ratios
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Every trust has an inclusion ratio that determines the portion of each future distribution or termination that will be subjected to
the GST Tax. [IRC 2642] For example, an inclusion ratio of "zero" means that the trust is totally exempt from the GST Tax;
an inclusion ratio of "one" means that all taxable distributions and taxable terminations will be fully subject to the GST Tax;
and an inclusion ratio of means that one-half of all taxable distributions and taxable terminations will result in a GST Tax.
The inclusion ratio for a trust is initially determined by calculating the portion of the transfer that is not covered by the GST
Exemption, or an exclusion, and dividing this amount by the value of the entire transfer. For example, if a person transfers
$1,500,000 into a generation skipping trust and allocates $1,000,000 of GST Exemption, the inclusion ratio would be:
$500,000 / $1,500,000 = 1/3
Subsequent transfers to an existing trust may affect the trust's inclusion ratio. If sufficient GST Exemption is allocated to the
subsequent transfer, the trust will retain its zero inclusion ratio. It is advisable not to make additions to an existing trust in
amounts that exceed the available GST Exemption. However, if there is not sufficient GST Exemption remaining, the
inclusion ratio is redetermined as follows:
First, the nonexempt portion of the trust (prior to the new transfer) is determined by multiplying the pretransfer value of
the trust assets by the existing inclusion ratio.
Second, the value of this nonexempt portion is added to the portion of the new transfer that is not covered by a GST
Exemption or exclusion.
Third, this total of the nonexempt amount is divided by the total value of the trust estate immediately following the new
transfer.
For example, if an existing trust with an inclusion ratio of 2/3 has trust assets valued at $750,000 (meaning that $500,000 is
currently not covered by GST Exemption), and if an additional $500,000 is transferred to the trust, but only $250,000 of GST
Exemption is allocated to the transfer, then the new inclusion ratio for the trust will be determined as follows:
($500,000 + $250,000) / $1,250,000 = 3/5
The Treasury Regulations include elaborate rules as to when trusts or shares will be treated as separate for purposes of the
inclusion ratio. Extreme caution is needed when, following the Grantor's death, a trust is to be divided into exempt and
nonexempt trusts for GST Tax purposes. This is particularly true when the division is created by means of a pecuniary
amount passing to the nonexempt trust with the remainder becoming the GST exempt trust. Generally, when such a
pecuniary amount is funded, it must be done within 15 months, or carry with it appropriate interest to compensate for the
delay in funding. It is also important that a trust is divided before any GST Exemption is allocated. For example, if there is a
$500,000 trust that has an inclusion ratio of , the Regulations do not allow this trust to be divided into a $250,000 trust with
a "zero" inclusion ratio and a $250,000 trust with a "one" inclusion ratio (even though such result sounds quite logical).
According to the Regulations, a division of this trust would result in two $250,000 trusts, each of which would still have an
inclusion ratio of .
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Because the typical goal of a GST plan is to provide additional assets to family members for several generations, charitable
distributions are not usually a part of a typical GST Trust arrangement. However, individuals who have established (or expect
to establish) GST Trusts for their descendants will often be the same individuals who will conclude that there may be
sufficient assets to share with charities. The wealthiest individuals are usually the ones who include GST Trusts as part of
their estate plans, and they are also the most likely to be able to afford to include significant portions for charity as part of
their plans.
For this reason alone it is important for charitable gift planners to understand and appreciate the importance of GST planning,
and the various rules that apply. It is not uncommon to find wills and revocable trusts that include a clause that provides for
some or all of the amounts in excess of the available GST Exemptions to be set aside for charity. Furthermore, in some GST
Trusts, the beneficiaries may be given fairly broad powers to determine the eventual recipients of the assets at the
beneficiary's death, and this might include the potential for distributions to be made to charity.
Conclusion
Estate planning and charitable giving are not independent concepts or approaches. The key to an effective charitable giving
plan requires coordination with the donor's overall estate plan. For many donors, GST planning may be a part of the estate
plan and therefore something that the gift planner must understand and appreciate. This article summarizes the basic
concepts and considerations involved in planning for and around the GST Tax, but there is much more that could be said.
This is one area where the inexperienced and/or untrained professional should not venture without the guide of an expert
who has been there many times before. But, hopefully, you now have some general information that will permit you to
participate in the discussions and provide a roadmap to the mysterious land of GST.
Feedback
The author welcomes your questions and feedback. Please send your email to Mr. Blakesley at: sblakesley@BSMWL.com
In this edition of Gift Planner's Digest, Kansas City, Missouri attorney Scott Blakesley provides an introduction to the basic
concepts of generation skipping transfer planning and why it needs to be considered in a well designed charitable gift plan.
Web site:
http://www.pgdc.com
Phone: 704.698.4050
http://www.pgdc.com/print/24268
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