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Estates, Trusts & Gifts

10 common Form 709
mistakes
Many taxpayers are responding to the
favorable gift and estate tax environ-
ment and making more gifts. While
it may take some finesse to report the
most complicated transactions on Form
709, United States Gift (and Generation-
Skipping Transfer) Tax Return, you do
not have to be a gift tax specialist to be
aware of 10 common return prepara-
tion mistakes.

1. GST consequences of
unreported gifts
One of the most perilous issues
on Form 709 arises from missed the impact of any gifts made during the it is of a present interest. To qualify
generation-skipping transfer (GST) year, even if they are below the annual transfers to trusts for the gift tax an-
tax elections. If a taxpayer makes a gift exclusion threshold. nual exclusion, trust agreements com-
to a trust and fails to affirmatively elect monly employ a Crummey withdrawal
whether to allocate GST exemption to 2. Annual exclusion claimed on right, which allows a beneficiary the
the transfer on a timely filed Form 709, gifts of illiquid assets right to withdraw a specified dol-
the automatic allocation rules under Sec. To qualify for the gift tax annual exclu- lar amount for a specified period
2632(c) apply. The automatic allocation sion, a gift must be of a present interest. (see Crummey, 397 F.2d 82 (9th Cir.
rules are complicated, and the result may This means that it must convey an 1968)). Crummey withdrawal language
not be what the taxpayer intended. unrestricted right to the immediate use, varies according to the drafting at-
For example, assume a taxpayer possession, and enjoyment of property or torney, so it is important to carefully
establishes a life insurance trust and the income therefrom. This facts-and- read the trust provisions to understand
contributes less than the annual exclu- circumstances test essentially requires the amount of the withdrawal right.
sion each year for 20 years. The trust is the donee to be able to convert the prop- Some agreements provide beneficiaries
intended to skip generations (i.e., pass to erty to cash. Case law (see, e.g., Price, the right to withdraw the lesser of
grandchildren or more remote descen- T.C. Memo. 2010-2) has scrutinized the transferred amount or the an-
dants), but no gift tax returns were filed, transfers of illiquid assets like partner- nual exclusion amount (or twice that
and no GST election was made for the ship interests. The courts have denied amount if the donor is married at the
trust. The taxpayer dies and the life in- the annual exclusion when the partner- time of the gift). Others stipulate that
surance pays out to the trust. Assuming ship agreement effectively barred trans- the donor can adjust the withdrawal
the application of Sec. 2632(c) does not fers to third parties, prevented partners amount, vary which beneficiaries re-
automatically allocate GST exemption from withdrawing their capital accounts, ceive the right, or specify the amount
to the trust, the trust will have a GST and did not require income distributions of the withdrawal in the Crummey
event when either distributions are made to limited partners. When taxpayers gift notice. The beneficiary must actually
to skip persons or there are no longer an illiquid asset, care should be taken to receive notice (generally in writing) of
IMAGE BY ARISTOTOO/ISTOCK A late allocation of GST exemption the annual exclusion. for the transfer to qualify for the an-
the right to withdraw trust property
any skip person beneficiaries of the trust.
determine whether the asset qualifies for
nual exclusion. As a best practice, tax
could be made to exempt the trust, but
3. Annual exclusions — read the
the cost generally would be the use of
preparers should request copies of the
withdrawal right provisions
Crummey letters to support the amount
an increased exemption amount, due to
increases in the trust values since the
and availability of exclusions taken on
As noted above, a gift will not qualify
Form 709.
for the gift tax annual exclusion unless
initial gift. Tax preparers should consider
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