Generation skipping tax law

[ScottS]

What is the name of your state? California

QUESTION I HAD IN MIND

Does the following trust meet IRS requirements regarding the exemption to the Generation Skipping Transfer Tax?

Father establishes a trust for his descendants.

1. Son is sole trustee.

2. The son is to “pay the income” to himself.

3. The son may also pay “sums from the principal” to himself

—if he deems the payments are “necessary or advisable” for his “health, maintenance, support and education, considering his income from all sources.”

4. The son can specify in his will how the assets shall be distributed among other descendant’s of his father.

On the son’s death, will all assets remaining in the trust be included in the son’s estate for purposes of the inheritance tax?

 

[abezon]

What is the name of your state? California

Father establishes a trust for his descendants.

1. Son is sole trustee.

4. The son can specify in his will how the assets shall be distributed among other descendant’s of his father.

On the son’s death, will all assets remaining in the trust be included in the son’s estate for purposes of the inheritance tax?

Probably. Son can control how they are distributed, so the assets are part of son's estate. Note, the trust as described may be invalid. It depends on state law. Seek help from a CA estate planning attorney before establishing any trusts. It's money well-spent. My concern is that this sounds like Dad's irrevocable trust morphs into son's grantor trust, & this may invalidate dad's irrevocable trust. This would mean that dad's estate would have to go through probate in the CA courts. $$$.

 

[tranquility]

I don't think it turns into a grantor trust as the HEMS is considered an ascertainable standard. It is often used when one wants the trustee to be the same as the beneficiary of an irrevocable trust.

I do have a problem with #4, however. It would take a while to think through all the problems with that, but I think that provision would not pass muster in avoiding the GST.

 

[abezon]

I don't have a problem with the health/education/etc., either. I think #4 is the problem. By having son specify in his will who inherits any remainder & how much, there is no ascertainable standard *for the remainder beneficiaries*. In the best case scenario, dad's irrevocable trust is valid for 1 generation (to son) & either terminates naturally or morphs into son's grantor trust. I am concerned that this lack of standards may invalidate dad's trust ab initio (from the get go), subjecting dad's 'trust' to probate fees.

As for the GST, I believe the IRS position is that anything you control the disposition of is part of your gross taxable estate at death. Since son controls the remainder of the trust, it should be part of his estate & will be included in his gross taxable estate when determining if his estate has to pay any death taxes. If son't total estate is below the $2M threshhold, this is good, since his heirs will get a step up in basis. If it's over $2M, this is bad, because the trust will be taxed when dad dies & again when son dies.

If the trust assets will be part of son's final estate, then GST is not an issue. GST applies only when assets are transferred so as to skip a living generation (skip kid & have grandkids inherit directly=GST; have grandkids inherit when their parent is dead=no GST issues).

NOTE: if this trust is big enough that dad expects son to have money left over to pass on to grandkids, dad has enough money to pay for an experienced estate planner to help him with this!

 

[ScottS]

How to go further with the question

The trust was executed in Florida a decade or so ago, and the grantor has long since passed away.

How can I get a more definitive answer regarding whether #4 implies that the remaining assets must be included in the son's taxable estate? Are either one of you available to provide for a fee an affidavit stating that it is your opinion that this is the case --- making reference to the authorities relied upon for your opinion and stating your qualifications?

 

[abezon]

You make an appointment with a trust attorney in California to find out if the current trust is valid under CA law or has to be redone.

 

[tranquility]

The "affidavit" you're looking for is called an opinion letter. The IRS has very specific requirements on such a letter. The end result is that resonable reliance on such a letter can take IRS penalties away if things are not treated correctly. It does not help with the taxing situation, nor with any lawsuits as the result of an error in the reporting. We don't do that many of these and have charged in the thousands for each. I have never used this list as a business generator and don't think I will start now so I won't do one, but you should be able to find someone if this is what you think you need.

If you want assurance, you need to get a letter ruling. We've only done one of these and I don't really have any expeirience to advise. This will also cost thousands to tens fo thousands for the preparation and for the filing fee with the IRS. Here, as long as you meet the requirements for submitting the application, you will have an answer as to how the IRS will treat things. This is extremely specialized, and expensive, work.

As abezon recommeded, I'd start with an estate attorney. Pay for his time and see where he recommends you go on how to report it. He will probably charge for even more time to research things as the grantor's death was so long ago.