New Requirement to File Gift Tax Returns

Article excerpt

Although much attention has been given to the gift and estate tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, important changes may have gone unnoticed. One such change is prompting many taxpayers that have never filed gift tax returns in prior years to do so this year. Many tax preparers may be unaware of the sudden need to file gift tax returns.

The Tax Act added section 2632(c) to Chapter 13 of the IRC, which provides that any gifts to a generation-skipping transfer (GST) trust will receive an automatic allocation of a donor's GST tax exemption in an amount necessary to exempt the trust from the GST tax. The section defines a GST trust as any trust that could have a generation-skipping transfer with respect to the transferor unless one of six exceptions apply. Using this definition, for example, a trust established to own a life insurance poli cy for the benefit of an individual's wife and children would be treated as a GST trust. If the trust provides that a grandchild will receive benefits from the trust in the event that one of donor's children died leaving children of their own. This kind of trust is common and unfortunately falls within the definition of a GST trust.

Although the new section 2632(c) provides for an automatic allocation of GST tax exemption, it also provides a way to elect out of the automatic allocation rule. …