1. 1 The Teenaged Tax Comes of Age Fran M. DeMaris Executive Vice President Cannon Financial Institute, Inc.

2. 2 Generation Skipping Transfer Tax Learning Map

3. 3 What is GSTT? A Transfer Tax similar to Gift and Estate tax Applies when assets are transferred two or more generations below the transferor Not unified with Gift and Estate Tax Imposed at the maximum estate tax rate (45% in 2008)

4. 4 GSTT Exemption and Rates YearExemption GST Tax Rate 2001$1,060,00055% 2002$1,100,00050% 2003$1,120,00049% 2004$1,500,00048% 2005$1,500,00047% 2006$2,000,00046% 2007$2,000,00045% 2008$2,000,00045% 2009$3,500,00045% 2010N/A (Estate & GST Tax Repealed) 2011+$1,000,000 (plus indexing)55%

5. 5 Why GSTT Is Important Not Widely, Well Understood Millions of Millionaires Unintentional skips Many Existing Plans Were Created Prior To Enactment Of GSTT

6. 6 Two Options Parent Child Grandchild Estate/Gift $ 2,000,000 41-45% GSTT $ 2,000,000 45% Estate/Gift $ 2,000,000 41-45% Estate/Gift $2,000,000 41-45%

7. 7 Effective Dates - When Does GSTT Apply? When a generation is “skipped” When, in a trust or similar arrangement, interests pass down multiple generations without Estate or Gift tax vesting in each generation When a trust has NO GPOA to a beneficiary All transfers after 10/22/86 and lifetime transfers after 9/25/85 are subject to GSTT

8. 8 When Does GSTT Not Apply When trust contains a GPOA to each generation When grandfathering rules apply: –Lifetime transfers (gifts) before 9/26/85 –Intervivos irrevocable trusts created before 9/26/85 –Testamentary irrevocable trusts before 10/22/86 –Decedents with revocable plans who have been incompetent from 10/22/86 until death

9. 9 Generation Assignment

10. 10 Generation Assignment Rules Family members assigned by relationship Non-family members assigned by relative age to transferor Determines relative generation to transferor

11. 11 Family Members Family Members are assigned generations based on relationship to the transferor Spouse is in transferor’s generation Adopted children fall into appropriate generation Family tree used is from transferor’s grandparents down

12. 12 “Family Members” Spouse Great- grandchild Grandchild Adopted Child Great- grandchild Grandchild Child Transferor Etc. Great- Niece/Nephew Niece/Nephew Brother/Sister Parents Etc. Twice Removed Once Removed First Cousin Uncle/Aunt Grandparents

13. 13 Spouse Great-grandchild Grandchild Adopted Child Great-grandchild Grandchild Child Transferor Pre-deceased Ancestor Rule When a child predeceases the transfer, the more remote descendants all ‘step-up’ a generation Applies to issue only, unless transferor has no issue. Then to niece/nephew, etc.

14. 14 Pre-deceased Ancestor Rule Results of predeceased child Spouse Great-grandchild Grandchild Adopted Child Great-grandchild Grandchild Transferor Etc. Great Niece/Nephew Niece/Nephew Brother/Sister

15. 15 Non-Family Members Age difference determines “generation” Each generation deemed to be 25 years Transferor deemed to be in middle of his/her generation, thus 12½ years to end of transferor’s generation 12½ + 25 = 37½ years Transfer to non-family member who is 37½ years younger than transferor is a skip

16. 16 Generation Assignment Putting It All Together “Skip Person” Family member two or more generations below transferor Non-family member 37½ years younger than transferor Trust with only skip person beneficiaries “Non-skip Person” Family member within two generations of transferor Non-family member with age within 37½ years of transferor Trust with any non-skip person beneficiary

17. 17 Types Of Skips

18. 18 Types of Skips Direct Skip takes place when transfer becomes irrevocable GSTT due at same time Gift or Estate tax applies –Direct Skip Indirect Skip might or will take place in the future Gift or Estate tax due on initial transfer GSTT due in future at occurrence of a taxable event –Taxable Distribution –Taxable Termination

19. 19 Direct Skip A lifetime or testamentary transfer to a skip person in which only skip person(s) have an interest Transferor pays the tax Tax reporting is on Form 709 or 706

20. 20 Taxable Distribution Distribution of funds to a skip person from a trust that has non-skip beneficiaries also Recipient skip person pays the tax (may also carry out DNI) Tax reporting on Form 706 GS(D) filed by recipient and 706 GS(D)-1 filed by trustee

21. 21 Taxable Termination Termination of the interest of the last non-skip person beneficiary Trustee pays the tax Tax reporting on Form 706 GS(T) filed by trustee

22. 22 Exemption & Exclusions

23. 23 Exclusions and Exemption Annual Exclusion Unlimited tuition & medical expense exclusion GSTT Exemption ($2,000,000 in 2008)

24. 24 Annual Exclusion Similar to Gift Tax Annual Exclusion Applies to outright direct skips and direct skips to a special trust –Income or corpus can be distributed only to the person benefited by the gift, and –The trust must be includible in the person’s estate at death [IRC 2642 (c)] Beware the application to Crummey trusts

25. 25 Different Rules for Gift &GSTT Gift Tax Annual Exclusion (Present Interest) Outright Simple Trust Minor’s Trust Crummey Powers GSTT Annual Exclusion (Non-taxable direct skip) Outright Direct Skip Direct Skip to “Special Trust” –One current beneficiary –Includible in his/her estate

26. 26 Exclusion for Qualified Transfers Direct payment to the service provider of tuition and medical expenses is exempt (as for Gift Tax) Unlimited amount No relationship need exist Applies to donor or distribution from a trust §2611(b)(1)

27. 27 GSTT Exemption $2,000,000 (Indexed starting in 1999) Changed in 2004 to new phased in UCEEA 2008 Exemption is $2,000,000 Allocated by transferor or personal representative on Gift or Estate tax return Irrevocable election Retroactive allocation allowed for unnatural order of death If not allocated, deemed allocation applies

28. 28 GSTT Exemption in Past Years 1986-1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $1,000,000 $1,010,000 $1,030,000 $1,060,000 $1,100,000 $1,120,000 $1,500,000 $2,000,000

29. 29 Allocation of the Exemption

30. 30 Determines the amount (ratio) of the transfer subject to (inclusion) GSTT Applies at time of direct skip or for the life of the arrangement for an irrevocable trust Can be adjusted for later transfers Inclusion Ratio

31. 31 Always, Always, Always split trusts to achieve a zero inclusion ratio!!!

32. 32 Why Split Trusts? To achieve zero inclusion ratio accounts Optimizes use of the generation skipping transfer tax exemption Fund can then be used for alternate purposes, have different distribution terms or be distributed last to non-skip persons Can optimize tax allocation clauses Provides specific fund to use for direct skips

33. 33 Split Trusts, How?  Formula in document  Power to split  In document  Under state law  Qualified Severance

34. 34 Qualified Severance The division of a single trust and the creation of two or more trusts if: 1.The single trust was divided on a fractional basis, and 2.The terms of the new trusts, in the aggregate, provide for the same succession of interests of beneficiaries as in the original Trustee may elect to sever a trust at any time

35. 35 “Reverse QTIP” Election An election to determine transferor QTIP for Gift/Estate Tax Qualifies for marital deduction only if elected Treats spouse as transferor even though spouse has no GPOA Reverse QTIP for GSTT Does not affect estate tax marital deduction achieved by QTIP election Treats decedent as transferor even though assets are included in survivor’s estate Enables optimum use of GSTT exemption

36. 36 Standard GST Estate Plan Will or Revocable Living Trust Second Marital or Survivor’s Trust Credit Shelter Trust Zero Inclusion Ratio Reverse QTIP Zero Inclusion Ratio Surviving Spouse may assign GSTT exemption to his/her assets and second marital trust