Form 8939 Guidance Concerning the Generation-Skipping Transfer (GST) Tax

By Matthew J. Ahearn and Brian M. Malec

This post continues on from our immediately previous posting concerning the Section 1022 election and filing requirements.  In this post, we will discuss the GST tax guidance in Notice 2011-66 (the “Notice”).

A. Decedents Who Died in 2010.

TRUIRJCA retroactively reinstated the GST tax for 2010, but effectively made the GST tax rate equal zero.  This rule applies regardless of whether a Section 1022 election is made by the executor.  The reason for this approach was to reinstate all of the GST tax rules, but not impose a GST tax on those transfers that would not have been subject to the GST tax but for the retroactive reinstatement.  TRUIRJCA also increased the GST exemption to $5,000,000.  If the executor makes a Section 1022 election, the Notice provides that the executor allocates the decedent’s remaining GST exemption by attaching Schedule R of Form 8939 to the timely filed Form 8939.

B. Inter Vivos Direct Skips.

Because the GST tax rate is effectively zero in 2010, it is clear that donors will not want to allocate GST exemption to direct skip gifts not in trust in 2010.  To do so would be a complete waste of the donor’s remaining GST exemption, as no tax would be incurred as a result of the direct skip gift regardless of the donor’s allocation of GST exemption.  Code section 2632(b)(3) provides that a donor can opt out of the automatic allocation of his or her GST exemption to a direct skip.  The Notice confirms this opt-out election can still be made on a timely filed Form 709, but it also provides that the IRS will interpret the reporting of a 2010 direct skip gift not in trust on a timely filed Form 709 as constituting the payment of tax at the rate of 0% and, therefore, as an election out of the automatic allocation of the donor’s GST Exemption.  Although not addressed in the Notice, it does not seem that the IRS interpretation would be sufficient to counter an affirmative allocation if one is made on the Form 709.  Rather than rely on the IRS interpretation, it is better practice to affirmatively opt out of the automatic allocation of a donor’s GST exemption on a timely filed Form 709.

The IRS interpretation does not apply to a direct skip gift in trust because a donor may want to allocate GST exemption to such a gift.  For example, a trust for the benefit of grandchildren could provide for distributions to great-grandchildren.  Such a trust would qualify as a skip person and a gift to it would be a direct skip.  Thus, the 0% tax rate would apply to that gift; however, because the move down rule of Code section 2653(a) would assign the transferor to the child’s generation, future distributions from the trust to great-grandchildren would be subject to the GST tax.  Therefore, a donor may want to allocate his or her GST exemption to that gift to make the funds exempt from future GST tax.

C. Filing Deadlines.

TRUIRJCA extended the filing deadline to September 19, 2011 (because September 17, 2011 falls on a Saturday) for any return required under the Code section 2662 (including any election required to be made on such return) to report a 2010 generation-skipping transfer (i.e., a direct skip, taxable distribution or taxable termination) occurring on or before December 16, 2010.  Note that this rule does not apply to indirect skips because these are not generation-skipping transfers.  TRUIRJCA also extended the filing deadline to September 19, 2011 for estate tax returns for decedents who died in 2010 before December 17, 2010, with decedents who died after that date subject to the normal 9 month rules (which places the filing deadline somewhere between September 19, 2011 and September 30, 2011).  The Notice provides with respect to generation-skipping transfers occurring at the decedent’s death that are reportable on Schedule R of Form 8939, the filing deadline is November 15, 2011.  TRUIRJCA did not otherwise extend the deadline for filing gift tax returns.  Due to the maze of filing deadlines, we have prepared the following Table to help you sort through the various reporting requirements.  Note that the Table includes non-GST gifts as well.

D.        Testamentary Transfers During 2010.

If an executor makes the Section 1022 election, the estate tax statutes would not be in effect with respect to that estate.  There are a number of references to the estate tax in the GST tax statutes, but the Notice provides that these references remain applicable even if a Section 1022 election is made.  For example, Code section 2612(c)(1) defines, in relevant part, the term “direct skip” as a transfer subject to a tax imposed by chapter 11 (i.e., the estate tax).  To resolve this problem in the application of the GST tax, the Notice states that the IRS will construe and apply any reference to Chapter 11 in the GST tax provisions without regard to whether the executor made a Section 1022 election.  We are not certain of the basis for this construction, but it appears that this approach will resolve problems in the application of GST tax provisions in the event a Section 1022 election is made.