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Complex Gift Reporting on Form 709: GRATs, Business Interests, Crummey Trusts, CLTs and CRTs, and QPRTsTHURSDAY, AUGUST 20, 2020, 1:00-2:50 pm Eastern

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August 20, 2020

Complex Gift Reporting on Form 709

Michael Boncher, CPA

Senior Manager, Tax

Cohen & Company

[email protected]

Scott Swain, CPA, CFA, CFP®, MT

Partner

Cohen & Company

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2020 Cohen & Company

PRESENTED BY

GRATs, Business Interests, Crummey Trusts, CLTs & CRTs, & QPRTs

Scott Swain, CPA, CFA, CFP®, MT

Michael Boncher, CPA

Complex Gift Reporting on Form 709:


Program Goals▪ This webinar is designed to:

› Guide practitioners through reporting of more complicated gifts utilized in estate planning

› Demonstrate examples of how these gifts should be reported and disclosed on Form 709

› Review Generation Skipping Transfer Tax and how to properly report direct and indirect skip gifts

6


OutlineI. Overview

II. Gifts to Crummey trusts

III. Gifts of privately held business interests

IV. Transfers to GRATs

V. Gifts to QPRTs

VI. Gifts to charitable trusts (CRTs & CLTs)

VII. GST exemption allocations for trust gifting

VIII. Adequate disclosure of gifts

IX. Other reporting issues

7


Quick Refresher▪ 2020 Annual Exclusion - $15,000 for 2020 (Under IRC §2503(b))

▪ Estate & Gift Exemption - $11,580,000 for 2020, up from $11,400,000 in 2019

▪ Current Exemption sunsets at 12/31/25 (§2010(c)(3)(C))

▪ Gift splitting is available for spouses (§2513(a))› All or nothing, can’t pick and choose gifts to split› Election can be made on a late filed return› Caution: If no return is filed, there is no gift split for that tax year

8


II. Gifts to Crummey Trusts


Crummey v. Commissioner (397 F.2d 82 (9th Cir. 1968))

▪ Withdrawal right for limited period of time creates a present interest in property gifted in trust

▪ Eligible for annual exclusion treatment under §2503(b), but must be documented with annual “Crummey letters”

▪ Annual exclusion can be claimed for multiple beneficiaries of the same trust (Rev. Rul. 80-261)

› Caution: §2514 may apply if pro rated gifts are > the greater of $5,000 or 5% of aggregate trust assets

› Caution: Some trust documents limit the withdrawal right to this “5 X 5” standard to avoid a “lapse of GPP”

› Caution: If spouse is a trust beneficiary, trust may limit withdrawal right may to the “5 X 5” standard

10


Gift Tax Reporting▪ Two components

› Amount subject to withdrawal right› Additional amount in excess of the right (if any)

▪ Trust document attachments › Attach a “certified or verified” copy of the trust document for initial

year (per 709 instructions)› Attach a summary of key provisions or a copy of the trust document

in future years› Best practice: Discuss the document with the drafting attorney

when first gift is reported

11


Gift Tax Reporting▪ Example Language for $20,000 gift in trust, with no gift split, direct skip

› Gift #1: $15,000Easton Doe - Name & AddressRelationship: GrandsonWithdrawal right under John Doe Irrevocable Insurance Trust FBO Easton DoeJane Doe, Trustee (With trust address & EIN)A copy of trust agreement is attached.Description of gift: CashPortion of gift value subject to withdrawal rights.

› Gift #2: $5,000John Doe Irrev. Trust FBO Easton Doe (With address & Trust EIN)Relationship: Trust for the benefit of Grandson Jane Doe, TrusteeA copy of the trust agreement is attached.Description of gift: CashPortion of gift value not subject to withdrawal rights.

12


Direct vs. Indirect Skip Gift Reporting▪ Direct Skip: A transfer to a skip person that is subject to estate

or gift taxes (§2612(c)).› Any taxable gift to a skip person is reported as a direct skip. › A transfer to a trust solely for the benefit of skip persons is also a direct

skip.› GST “Annual Exclusion” may be available for direct skips

▪ Indirect Skip: Any transfer of property (other than a direct skip) subject to the gift tax made to a “GST trust” (§2632(c)(3)(A)).

› Best practice: Report all gifts in trust as indirect skips, unless a direct skip, or 0% chance of a skip

13


Identifying Direct Skips Gifts Made in Trust▪ No portion of income or principal available to anyone other than the

beneficiary, and

▪ Trust must either terminate during the beneficiary’s life, or be includible in the beneficiary’s estate at death, typically via a general power of appointment

› Often separate trusts are set up for each skip beneficiary› Example language:

• The beneficiary will have the power to appoint all of the trust assets remaining at death to or for the benefit of his then living lineal descendants, the lineal descendants of his parents, the beneficiary’s estate, or the creditors of the beneficiary’s estate, in such amounts as the beneficiary may appoint by specific reference to the exercise of this general power of appointment in the beneficiary’s will.

14


III. Gifts of Privately Held Business Interests


Installment Sales & Intentionally Defective Grantor Trust (IDGTs)

▪ Seed gift uses basic exclusion amount› Minimum of 10% of total› Demonstrates borrowing capacity

▪ Remaining interest financed by seller with note at the AFR

▪ Eliminates taxable gain to seller

▪ Carryover basis for buyers

▪ Grantor pays tax on trust income

▪ Efficient GSTT planning vehicle

16


IDGT Example▪ $10M FMV of asset

▪ 20% valuation discount (15-35% range)

▪ $8M discounted value

▪ $800,000 seed gift to trust

▪ $7.2M sale to trust via 9-year note

▪ Mid-term AFR 0.41% - August 2020

17


Gift Tax Reporting▪ Check the box on top of page 2 regarding valuation discounts and attach

additional explanation▪ Valuation by qualified appraiser is not required in order to substantiate

gift value, but highly recommended for gifts of significant value ▪ Example language

The John Doe Irrevocable Trust (Include address & EIN)Jane Doe, TrusteeAssignment of 500 Class B shares of Doe, LLC (Include address & EIN)LLC was established in the state of Ohio on 1/1/2010Fair market value determined based on Appraisal Co. valuation of class B units with discounts for lack of marketability & controlA copy of the valuation report is attached, along with a copy of the trust agreement, and a schedule of all parties related to the transferor holding an equity interest in Doe, LLC

▪ Need to report cost basis of gifted shares as well

18


Additional Gift Tax Disclosure▪ §6501(c)(9) Disclosure – Best Practice is to attach a statement

documenting the details of the shares that were sold, along with a qualified appraisal.

› (c)(9) Gift tax on certain gifts not shown on return› If any gift of property the value of which (or any increase in taxable gifts

required under section 2701(d) which) is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b)), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item.

19


Defined Value Transfers▪ Limits gift or transfer to a

defined value rather than a stated number of shares

▪ Units initially transferred based on an independent valuation

▪ If challenged by IRS, units ultimately transferred adjusted to match defined value

20


IV. Transfers to Grantor Retained Annuity Trusts (GRATs)


Grantor Retained Annuity Trusts (GRATs)▪ Transfer assets to trust for specified term

in exchange for an annuity

▪ Annuity calculated at the §7520 rate

▪ Excess appreciation goes to beneficiaries

▪ Minimum term of two years

▪ Estate tax inclusion if grantor dies during the term of the GRAT

▪ “Zeroed-out” design can eliminate exemption usage

▪ Carryover basis

▪ Not eligible for annual exclusion (future interest)

▪ GSTT exemption not allocable until end of trust term

22

Assets

Annuity

Assets remaining atend of termG

T

GRAT B

©2016 Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.


GRAT Details▪ In general, if a gift is made to a trust for the benefit of a member of the

transferor’s family, retained interests are valued at zero unless the interest is a qualified interest. (§2702(a)(2)).

▪ If the retained interest is valued at zero, by definition, the remainder interest would then equal the fair market value of the property. As a result, the full fair market value of the property constitutes a taxable gift.

▪ Family Members: Transferor’s spouse, any ancestor or lineal descendant of the transferor or spouse, a sibling of the transferor, or spouse of any ancestor, descendant, or sibling (§2704(c)(2)).

23


GRATs – Qualified Annuity InterestReg. 25.2702-3(b)(1)(i)

▪ Irrevocable right to receive a fixed amount;

▪ Must be payable to the holder of the annuity interest at least annually;

▪ Cannot be a right of withdrawal;

▪ Payment of the annuity cannot take the form of the issuance of a note, other debt instrument, option, or other similar financial arrangement.

24


GRAT Example▪ Assume an individual transfers $8,000,000 to a GRAT with an

annual annuity of $835,622 for 10 years in May of 2020› Section 7520 Rate: 0.8%› Annuity Factor From IRS Table B: 9.5737› Present Value of the Annuity: $7,999,994 ($835,622 * 9.5737)› Remainder Interest: $6 ($8,000,000 - $7,999,994)› Taxable Gift: $6

25


Gift Tax Reporting▪ Example language

› John A. Doe Grantor Retained Annuity Trust, Dated July 1, 2019

› Trust EIN and Address› Jane A. Doe, Trustee

▪ Description of Gift –› Transfer of 160,000 shares of: ABC

Corporation› Corporation EIN and Address

▪ Shares Valued At: $8,000,000› Taxable Gift Valued At: $6› Qualified Retained Interest Valued

At: $7,999,994

▪ See Attachments (Trust Agreement, Calculation of Taxable Gift, Valuation, Schedule of Related Parties)

26


V. Gifts to Qualified Personal Residence Trusts (QPRTs)


Qualified Personal Residence Trusts

▪ Transfer residence to trust in exchange for use as a personal residence for a specified term

▪ Not eligible for the annual exclusion (future interest)

▪ Cannot hold personal property▪ Ineligible assets must be

distributed to the grantor or converted and held in a separate share of the trust treated as a GRAT

▪ Estate tax inclusion if grantor dies during the term of the QPRT

29

Beneficial interestaccrues after term ends

QPRT

GrantorChildren& Spouses

Grantor

Right to residefor 10 years

Residenceand Cash



QPRT Details▪ An exception to the general rule that values a retained interest at zero if

a gift is made to a trust for the benefit of a member of the transferor’s family is if the transfer of an interest in trust consists of a residence to be used as a personal residence by persons holding term interests in the trust (§2702(a)(3)(A)(ii)).

▪ A personal residence of a term holder is either (Reg. 25.2702-5(c)(2)):

1. The principal residence of the term holder;

2. One other residence of the term holder; or

3. An undivided fractional interest in either.

30


QPRT Details▪ The governing instrument must provide that within 30 days after

the date the trust ceases to be a QPRT, ineligible assets are distributed to the term holder or are converted to and held for the balance of the term holder’s term in a separate share of the trust treated as a GRAT (Reg. 25.2702-5(c)(8)).

31


QPRT Example▪ Example: Assume an individual at age 50 transfers (reversionary interest retained) a

residence with a fair market value of $500,000 to a QPRT with a 10 year term in May of 2020. At the end of the term, the residence is distributed to the individual’s child.

▪ Section 7520 Rate: 0.8%▪ Grantor’s Age: 50▪ Term of Trust (Years): 10▪ Grantor’s Age at Termination Date: 60▪ Table 2000CM Value Beginning Age: 93591▪ Table 2000CM Value Ending Age: 87595▪ Ending Age Value Divided by Beginning Age Value: 0.93593401▪ Remainder Interest from Table B: 0.923410▪ Gift Factor: 0.86425082 (0.93593401 * 0.923410)▪ Fair Market Value of Property: $500,000▪ Value of Gift: 432,125

32


Example language for gift to QPRT▪ John A. Doe Qualified Personal

Residence Trust, Dated July 1, 2019› Trust EIN and Address› Jane A. Doe, Trustee

▪ Description of Gift –› Gift of Residence Located At:› Address, Parcel Number, and Legal

Description of the Property

▪ Residence Valued At: $500,000› Taxable Gift Valued At: $432,125› Value Retained by Grantor: $67,875

▪ See Attachments (Trust Agreement, Calculation of Taxable Gift, Deed, Real Estate Valuation, Schedule of Related Parties)

33


VI. Gift to Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs)


Charitable Remainder Trusts (CRTs)▪ Split interest charitable trust under IRC §664

▪ Annual payments to trust beneficiary with annuity value calculated using §7520 rate for month of gift or 2 prior month. (Higher rate = larger income tax deduction)

▪ Normally quarterly payments are made

▪ Remaining trust assets to charity at end of trust term with income tax deduction in year of gift

▪ Charitable beneficiary options: Restrictions on family foundations


35

Assets

Annuity and income/estate/gift tax deduction

Remaining assets andIncome at term endD

T

CRT

C

CB


Charitable Remainder Trusts▪ Two varieties

› CRAT - “annuity” trusts have a fixed annual payment amount for up to 20 years, range of 5% to 50% of initial value (Under §664(d)(1))

› CRUT - “unitrust” pays out a fixed percentage of assets annually to beneficiaries for up to 20 years, range of 5% to 50% of trust assets, valued annually (§664(d)(2))

▪ Can be set up as a fixed term of years or a lifetime interest▪ CRTs are not as attractive in low interest rate environments (minimum

10% to charity makes it difficult)▪ 709 may not be required if incomplete gift, but Best Practice is to

always file in order to document interest rate election. ▪ Caution: An interest rate election should also be attached to the

income tax return where the charitable deduction is claimed.

36


CRAT Examples▪ Transfer $1M to 20-year CRAT

▪ 5% ($50,000) payout to beneficiary for 20 years

▪ 2.8% §7520 rate (August 2019)

▪ $765,696 PV of annuity

▪ $234,304 remainder interest gift / charitable deduction

▪ If 6% total after-tax return, $1,326,472 transferred to charity

▪ Same assumption except use August 2020 §7520 Rate:

▪ Charitable remainder = $58,253

▪ Would not pass the 10% remainder test under §664(d)(1)(D)

37


Charitable Remainder Trusts▪ Example language:

Name of Charity: United Way (Include address & EIN)Description of assets gifted: Remainder interest in $1,000,000 of cash gifted to John Doe Family Charitable Remainder Annuity TrustTrust term is 20 years with annuity payment paid quarterly to the grantor, John Doe. As such no taxable gift is reported. Jane Doe, Trustee (Include trustee address and Trust EIN)A copy of the trust agreement, related present value calculations, and interest rate election statement are attached

▪ Best Practice: Attach a copy of present value of charitable annuity / taxable gift calculations. If attorney prepared, request a copy.

38


Charitable Lead Trusts (CLTs)▪ Split interest charitable trust with gift

tax deduction provided under IRC §2522(c)(2)(B)

▪ “Guaranteed” annual payments to charity, annuity valued using §7520 rate for current or prior 2 months (Lower rate = smaller taxable gift)

▪ Excess appreciation to heirs at the end of the trust term

▪ Charitable beneficiary options: Restrictions on family foundations

▪ Non-Grantor vs. Grantor

▪ Generally not used for GST transfers

39


Charitable Lead Trusts▪ Two varieties

› CLUT - “unitrust” pays out a fixed percentage of assets annually to charity› CLAT - “annuity” trusts have a fixed annual payment amount based on

initial gift value› CLAT can be optimized as a “zero gift” CLAT

▪ Can be set up as a fixed term of years or a lifetime interest

▪ CLTs are very attractive in low interest rate environments (0% gift / 100% deduction for grantor trust easier to achieve)

▪ Reporting on gift tax return is required to document the value of the remainder interest

▪ Caution: An interest rate election should also be attached to the income tax return where the charitable deduction is claimed for a “Grantor” CLT

40


CLAT Example▪ Transfer $1M to 20-year CLAT

▪ 5.213% ($52,130) payout to charities for 20 years

▪ 0.4% §7520 rate, (August, 2020)

▪ $1,000,000 PV of charitable benefit

▪ $0 PV remainder interest gift

▪ If 6% total after-tax return, $1,289,502 transferred tax free in year 20 with 0.4% rate

▪ More aggressive variable annuity payments are possible

▪ If $20 annuity in year 1, increasing at 75% each year until $538,350, in year 20, $0 taxable gift, and $1,841,849 transferred tax free in year 20, with assumed 6% after tax return

41


Charitable Lead Trusts Example language:

Doe Family Charitable Lead Annuity TrustJane Doe, Trustee (Include trustee address and Trust EIN)Description of assets gifted: Remainder interest in $1,000,000 of cash gifted to trust. Donor’s daughter, Jane Doe, is the remainder beneficiary. United Way of Cuyahoga County is the term annuity beneficiary. (Include address & EIN)Trust term is 20 years with annual annuity payment of 5.2315% paid to the charity. Present value of the charitable annuity interest = $1,000,000. As such, the value of the remainder interest for gift tax purposes is $0. A copy of the trust agreement, related present value calculations, and interest rate election statement are attached

▪ Best Practice: Attach a copy of present value of charitable remainder / taxable gift calculations. If attorney prepared, request a copy.

42


VII. GST Exemption allocations for trust gifting


GST Exemption Allocations

▪ Direct Skip▪ Indirect Skip▪ GST Trust▪ GST Exemption Allocation Elections▪ Inclusion Ratio

44


Direct Skip▪ A transfer to a skip person that is subject to estate or gift taxes

(§2612(c)).

▪ Example: A taxable gift or a bequest at death to a grandchild is a direct skip.

▪ A transfer to a trust solely for the benefit of skip persons is also a direct skip.

▪ The GST tax paid by the transferor is an additional taxable gift (§2623 and 2515).

45


Indirect Skip

▪ Any transfer of property (other than a direct skip) subject to the gift tax made to a “GST trust” (§2632(c)(3)(A)).

▪ GST Trust: A trust that could have a generation-skipping transfer with respect to the transferor (§2632(c)(3)(B)).

46


Direct & Indirect Skip Gifts▪ An individual may allocate his or her GST exemption at any time

from the date of the transfer through the date for filing the individual’s Federal estate tax return (Reg. 26.2632-1(a)).

▪ If an individual makes a direct skip during lifetime, the transferor’s unused GST exemption is automatically allocated to the transferred property. The transferor may prevent the automatic allocation of GST exemption by describing on a timely filed Form 709 the transfer and the extent to which the automatic allocation does not to apply (Reg. 26.2632-1(b)(1)).

47


“Non-GST” Trusts▪ There are six situations in which a trust that would otherwise be a

GST trust is not a GST trust (§2632(c)(3)(B)(i) through (vi)).

› 1. The trust provides that more than 25 percent of the trust corpus must be distributed or may be withdrawn by non-skip person(s) before age 46, on or before one or more dates specified in the trust that will occur before age 46, or upon the occurrence of an event that may reasonably be expected to occur before age 46;

› 2. The trust provides that more than 25 percent of the trust corpus must be distributed or may be withdrawn by non-skip person(s) and who are living on the date of the death of another person identified in the trust who is more than 10 years older than the individual(s).

48


“Non-GST” Trusts› 3. The trust provides that if one or more of the individuals who are

non-skip persons die on or before a date or event described in items 1 or 2 on the previous page, more than 25 percent of the trust corpus either must be distributed to the estate(s) of the individual(s) or is subject to a general power of appointment exercisable by such individual(s);

› 4. Any portion of the trust would be included in the gross estate of a non-skip person (other than the transferor) if the person died immediately after the transfer;

› 5. The trust is a charitable lead annuity trust, a charitable remainder annuity trust, or a charitable remainder unitrust, or

› 6. The trust is a charitable lead unitrust and the noncharitable beneficiary of the trust is a non-skip person.

49


Indirect Skips▪ In the case on an indirect skip, the transferor’s unused GST

exemption is automatically allocated to the property transferred. ▪ The automatic allocation is effective whether or not a Form 709 is

filed reporting the transfer, and is effective as of the date of the transfer. Caution: An automatic allocation is irrevocable after the due date of the Form 709 for the calendar year in which the transfer is made (Reg. 26.2632-1(b)(2)(i)).

▪ The transferor may elect out of the automatic allocation of GST exemption to an indirect skip (Reg. 26.2632-1(b)(2)(iii)).

▪ The election must be made by attaching a statement to a timely filed Form 709 for the calendar year in which the first transfer to be covered by the election out was made (Reg. 26.2632-1(b)(2)(iii)(C)).

50


GST Elections▪ A transferor may elect to treat any trust as a GST trust

(Reg. 26.2632-1(b)(3)).

▪ The election is made by attaching a statement to a timely filed Form 709 for the calendar year in which the first transfer to be covered by the election is made (Reg. 26.2632-1(b)((3)(ii)).

51


Non-Automatic Allocation of GST exemption:▪ The allocation must identify the trust to which the allocation is

being made, the amount of GST exemption allocated to it, and if the allocation is late or if the inclusion ratio is greater than zero, the value of the assets at the effective date of the allocation. The allocation should also state the inclusion ratio of the trust after the allocation. Caution: An allocation of GST exemption becomes irrevocable after the due date of the return (Reg. 26.2632-1(b)(4)(i)).

▪ An allocation of GST exemption may also be made by formula.

52


GST Exemption Allocations▪ An allocation of GST exemption is effective as of the date of any

transfer if the Form 709 to which it relates is timely filed.

▪ Caution: An allocation to a trust made on a late filed Form 709 is effective on the date the Form 709 is filed (Reg. 26.2632-1(b)(4)(ii)).

53


Best PracticesIt can be difficult for a CPA to determine if a trust is a GST trust or not. ▪ Best Practice #1 to avoid mistakes:

› If allocation of the GST exemption is desired, always attach the election to treat the trust as a GST trust with respect to all current-year and future transfers, and show the allocation on Form 709, Page 5, Schedule D, Part 2, Line 5. Continue to file the election for future gifts.

› If allocation of the GST exemption is not desired, make the election to opt out of the automatic allocation rules, and don’t include any allocation on Form 709, Page 5. Continue to file the election for future gifts.

▪ Best Practice #2: Always consult with the drafting attorney in the year of the first gift to establish a consensus on whether GST Exemption should be allocated or not.

54


Inclusion Ratio▪ The GST tax is imposed a the maximum Federal estate tax rate

multiplied by the inclusion ratio (§2641).

▪ The inclusion ratio is defined as 1 minus the “applicable fraction.” The numerator is the amount of GST tax exemption allocated to the transferred property and the denominator is generally the value of the transferred property (§2642).

▪ Example:› Assume an individual transfers $1,000,000 to a trust, but only

allocates $750,000 of GST tax exemption to the trust. The applicable fraction would be .75 (750,000 / 1,000,000) and the inclusion ratio would be .25 (1 - .75).

55


VIII. Adequate Disclosure


Adequate Disclosure

▪ Statute of Limitations▪ Adequate Disclosure for Transfers Subject to IRC Sec. 2701

and 2702▪ Adequate Disclosure for Transfers not Subject to IRC Sec.

2701 and 2702▪ Non-gift transfers▪ Completed Gifts▪ Incomplete Gifts

58


Adequate Disclosure▪ Caution: The statute of limitations (generally three years (§6501)) does

not begin if a gift is not “Adequately Disclosed.” (Reg. 301.6501(c)-1(e) and (f)).

▪ Adequate disclosure for transfers subject to the special valuation rules of §2701 (Transfers of Certain Interests in Corporations or Partnerships) and §2702 (Transfers of Interests in Trusts) (Reg. 301.6501(c)-1(e)(2)):

1. A description of the transactions, including a description of transferred and retained interests and the method used to value each;

2. The identity of, and relationship between, the transferor, transferee, all other persons participating in the transactions, and all parties related to the transferor holding an equity interest in any entity involved in the transaction.

59


Adequate Disclosure3. A detailed description (including all actuarial factors and discount rates used) of the method used to determine the amount of the gift. In the case of an equity interest that is not actively traded, the financial and other data used in determining value. Financial data should include balance sheets and statements of net earnings, operating results, and dividends paid for each of the 5 years immediately before the valuation date.

60


Adequate Disclosure▪ Adequate disclosure for transfers not subject to the special valuation

rules of §2701 (Transfers of Certain Interests in Corporations or Partnerships) and §2702 (Transfers of Interests in Trusts) (Reg. 301.6501(c)-1(f)(2)):

1. A description of the transferred property and any consideration received by the transferor;

2. The identity of, and relationship between, the transferor and each transferee;

3. If the property is transferred in trust, the trust’s tax identification number and a brief description of the terms of the trust, or in lieu of a brief description of the trust terms, a copy of the trust instrument;

61


Adequate Disclosure4. If an appraisal is not attached to the return:

▪ A detailed description of the method used to determine the FMV of the property unless the property is traded on an established exchange;

▪ If the value of an entity is based on the net value of the assets, 100 percent of the value of the entity and the pro rata portion of the entity transferred;

▪ In a tiered structure, the above information must be provided for each entity if relevant and material in determining the value of the interest;

▪ If the property is traded on an established exchange, the name of the exchange, the CUSIP number, and the mean between the highest and lowest quoted selling prices on the valuation date; and

62


Adequate Disclosure5. A statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue ruling published at the time of the transfer.

▪ An appraisal of the transferred property can be submitted in lieu of item 4 on the previous page (Reg. 301.6501(c)-1(f)(3)).

▪ Completed transfers to members of the transferor’s family that are made in the ordinary course of operating a business are deemed to be adequately disclosed even if the transfer is not reported on a gift tax return, provided the transfer is properly reported by all parties for income tax purposes (Reg. 301.6501(c)-1(f)(4)).

63


Adequate Disclosure▪ Completed transfers not constituting gifts will be considered adequately

disclosed if the following is provided with the gift tax return (Reg. 301.6501(c)-1(f)(4)).

› A description of the transfer and any consideration received;› The identity and relationship between the transferor and each transferee;› If the transfer is in trust, the trust’s FEIN and a copy of the trust; and› A statement describing any position contrary to any Treasury regulation

(proposed, temporary, or final) or revenue ruling.

▪ Adequate disclosure of a transfer that is reported as a completed gift on a gift tax return will begin the statute of limitations even if the transfer is ultimately determined to be an incomplete gift. On the other hand, reporting an incomplete gift does not begin the statute of limitations even if the transfer is determined to be a completed gift (Reg. 301.6501(c)-1(f)(5)).

64


IX. Other Reporting & Planning Issues


Comparison of Transfer StrategiesOutright Gift IDGT GRAT CLAT

Gift Yes, for full value of transfer Yes, for seed fundsYes, of PV, except ‘zeroed-out’ GRATs

Yes, for non-reversionary CLATs that are not ‘zeroed-out’

Tax Treatment Future income/sale proceeds taxed to beneficiary

Grantor trust Grantor trust Grantor or Non-grantor trust

‘Freeze’ Asset Value Yes Yes, when note is paidYes, once principal is paid and grantor survives

Yes

Mortality Risk No Yes, until note is repaid Yes Yes, for grantor CLATs

GST Exemption Yes Yes NoYes, subject to the adjusted GST exemption amount

Carryover Basis Yes Yes Yes Yes

Gift Tax Issues

Yes, file 709 if value exceeds annual exclusion or gift is asset other than cash/publicly traded securities

Yes, file 709 for seed fundsYes, file 709; recommended even if ‘zeroed-out’

Yes, file 709 for non-reversionary remainder interest

Valuation Rate Fair market valueAFR (May 2020: mid-term 0.58%; long-term 1.15%)

§7520 rate (May 2020: 0.8%) §7520 rate (May 2020: 0.8%)

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Questions?

Scott SwainCPA, CFA, CFP®, MT Partner, [email protected]

Michael Boncher, CPASenior Manager, [email protected]

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CIRCULAR 230 DISCLOSURE NOTICE:Any U.S. federal tax advice included in this communication(including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.

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Documents

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