CONSIDER FILING A GIFT TAX RETURN TO AVOID WASTING YOU GENERATION-SKIPPING TAX EXEMPTION

In general, for gifts made during the year 2002, a federal gift tax return is not required if the total annual gifts (by a donor to a particular donee) total $11,000 or less and such gifts qualify as gifts of a present interest. Outright gifts of cash qualify as gifts of a present interest. Gifts to a trust (such as an irrevocable insurance trust) qualify as gifts of a present interest if certain conditions are met (e.g., proper demand powers must be placed in the trust instrument and the various procedural aspects are followed with respect to notifying the beneficiaries of current gifts to the trust).

Under the current tax law, even if gifts to a trust do not total more than $11,000 per donee, you may wish to file a gift tax return for the sole purpose of preventing your lifetime generation-skipping exemption from being potentially wasted on such gift.

Generally, transfers to a grandchild or a more distant descendant (either during life or upon death) would constitute a generation-skipping transfer which is subject to a tax equal to the highest gift/death tax rate. This generation-skipping tax is in addition to the gift/death tax. Each person is, however, allowed a lifetime exemption for generation-skipping transfers. As of the year 2002, this lifetime exemption is $1,100,000.

Under the current law, your lifetime generation-skipping exemption would be automatically allocated to certain gifts to a trust unless a gift tax return is filed electing out of such treatment This election is apparently required even if no gift tax return is otherwise required to be filed. Without this election on a filed gift tax return, you could be wasting a portion of your lifetime generation-skipping exemption by allocating it to your trust which may never result in a generation-skipping transfer and to that extent your generation-skipping exemption would not otherwise be available for other generation-skipping transfers that may occur.

For example, in the case of a typical irrevocable insurance trust where the surviving spouse and children are the primary beneficiaries, a donor may not want to allocate his or her lifetime generation-skipping exemption to such a trust since the assets will most likely be distributed to the surviving spouse and/or children and not the grandchildren. Thus, distributions from this trust would not otherwise be subject to the generation-skipping tax. Unless you filed a gift tax return for gifts to this trust, the generation-skipping exemption would automatically be allocated to the gifts to the trust.

Please contact Dennis E. Frisby if you want to discuss this matter further, or desire us to prepare your gift tax return to elect to not use your generation-skipping exemption for gifts to your trust. Gift tax returns are due by April 15th unless an extension is filed.

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