Related Practices

• Estates and Trusts

If an irrevocable trust is part of your estate plan, the following information will be important to you.

Irrevocable trusts are generally designed to reduce federal estate tax and benefit the creator’s immediate family.  However, it is not unusual that grandchildren are also primary or additional beneficiaries of an irrevocable trust.  Federal tax law imposes a generation skipping transfer tax and limits the amount that can be set aside tax free for grandchildren to $1.1 million.  (That limitation is popularly called the “GST Exemption.”)  Until recently, the generation skipping transfer tax laws did not include a presumption that persons making gifts to irrevocable trusts wanted to “use” GST Exemption to shelter that trust from the generation skipping transfer tax.  Rather, one could elect to shelter a trust from generation skipping transfer tax by filing a gift tax return and affirmatively allocating GST Exemption to the annual trust gifts.  In this way, the trust creator could easily “track” the amount of GST Exemption used and avoid “wasting” any part of the GST Exemption on a trust that would not pass to a grandchild.

A little-noticed provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) changes rules relating to the use of the GST Exemption.  Beginning in 2001 (for gift tax returns to be filed in 2002), EGTRRA mandates an automatic allocation of GST Exemption for “additions” to certain types of trusts unless the donor files a gift tax return and makes a contrary election.  

Unfortunately, the new rules are unclear in several important respects, especially the description of the types of trusts to which this “automatic allocation” applies.  

Consequently, until the IRS issues clarifying regulations, we, as well as most estate planning attorneys throughout the country, recommend that clients who made gifts to an irrevocable trust during 2001 file a 2001 gift tax return in order to make an appropriate GST election (either to allocate GST Exemption or not to allocate GST Exemption to the gift).  By doing so, any ambiguity as to the use of the GST Exemption, amount of GST Exemption used and the resulting generation skipping transfer tax status of the affected irrevocable trust will be resolved.   

Your Cohen & Grigsby estate lawyer will be pleased to further discuss this important matter with you.