By: Judson M. Stein
Late last year, the Joint Committee on Taxation published what is colloquially known as the “Blue Book” – the Committee’s explanation of recent changes in the tax law. While not considered as part of the law’s legislative history, the Blue Book provides significant insight into the interpretation of the law. The December 2018 Blue Book addressed, unsurprisingly, the Tax Cuts and Jobs Act of 2017 (“TCJA”) and touched specifically on several matters related to estate planning. Perhaps the most interesting of these discussions is the application of the increased Generation-Skipping Transfer Tax (“GST”) exemption.
The TCJA greatly increased the GST exemption amount, as well as the Estate and Gift exemption amounts. Previously, each of these exemption amounts were $5,000,000 subject to annual inflation increases from 2011. The TCJA increased the exemption amounts to $10,000,000, subject to annual inflation increases for 2011; as such, the exemption amounts for 2019 are $11,400,000. However, the increases enacted by the TCJA expire at the end of 2025, at which time the prior, lower, exemption amounts will again become effective.
In its publication, the Committee states that a taxpayer can allocate the increased GST exemption to indirect skip transfers made before the TCJA became effective. This would effectively permit a transferor to utilize the increased GST exemption to change the inclusion ratio of such transfers and potentially transform a GST Non-Exempt trust to a GST Exempt trust; thus, avoiding the imposition of a Generation-Skipping Transfer tax on future distributions from such trusts, even if made after 2025.
The Blue Book offers the following example to illustrate the effects of the increased exemption as applied to previous transfer to indirect skips:
“On March 15, 2016, T gave property with a value of $6,000,000 to a trust for the benefit of T’s descendants (Trust A) and T’s entire then-remaining Generation-Skipping Transfer tax exemption of $5,400,000 was allocated to Trust A on a timely filed gift tax return. As of the date of the 2016 gift, Trust A has an inclusion ratio of 0.100 [1 – ($5,400,000/$6,000,000)]. On July 1, 2018, when the property in Trust A has a fair market value of $7,000,000, T files a gift tax return and allocates $700,000 of Generation-Skipping Transfer tax exemption to Trust A, reducing Trust A’s inclusion ratio from 0.100 to 0 [1- (($700,000 + (90% x $7,000,000))/$7,000,000))]. Effective on July 1, 2018. Absent additional contributions to Trust A, the Generation-Skipping Transfer tax on taxable distributions from, or taxable terminations with respect to, Trust A on or after July 1, 2018, is determined using an inclusion ratio of Zero.” Link; (p. 89, FN 372).
The publication of the Blue Book and its discussion of the increased exemptions for Estate, Gift, and Generation-Skipping Transfer taxes only further underscores the necessity of continued periodic review of one’s estate planning. The Tax Cuts and Jobs Act presents many planning opportunities which, when properly utilized, can have a beneficial effect on wealth transfer planning.