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Gift Tax Common mistakes on form 709 that's the subject of today's ACTEC Trust and Estate Talk.

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Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. The this series offers professionals best practice advice, insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.

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This is ACTECH Fellow Travis Hayes of Naples, Florida. Form 709, officially titled United States Gift and Generation Skipping Transfer Tax Return, is a tax form used by US Taxpayers to report gifts that exceed the annual exclusion amount, to elect gift splitting between spouses and to allocate GST tax exemptions exemption to transfers. ACTEC Fellow Steve Bono of Chicago, Illinois joins us today to review common mistakes made on Form 709, from pebble sized problems to Boulder sized blunders. Welcome Steve.

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Thanks Travis. And hello everyone. It's a pleasure to be here today for this podcast. So I'm going to give you the kind of the Cliff Note summary of our presentation that took place in June at the summer meeting. We had a detailed case study involving Harry and Wanda Grosseux, Mr. And Mrs. Big Bucks. And I'm going to start with kind of the most benign or the smallest problem and then kind of make up make our way through as those problems get bigger. As Travis kind of mentioned, we had different types of classifications for these problems. We use the imagery from our description when we used classification of sedimentary rock. And so we had grains of sand, pebbles, cobblestones and boulder. So the first issue that I'm going to start with you today is going to be the failing to report Wanda, who is our deceased spouse. She died in 2024, halfway through 2024. The failure to report her DC amount on Harry's timely filed 2024 gift tax return. It was filed on April 15th of December this year and at the time that that return was timely filed, Wanda's estate tax return was not yet complete. It wasn't filed. The DC amount was not yet determined. And so as a result his return was was filed without reporting the DC amount. That's a very common situation. So the fix to this this issue, it's very minor. It is a grain of sand. What you can do is one of two things. We knew that Harry was going to be filing an amended gift tax return and so on that amended gift tax return. What we're simply going to do is complete Schedule C. We're going to report the DCU amount that he is receiving from Wanda. He is going to then kind of compute whatever the applicable credit amount is, which is going to take into account his basic exclusion and the DCU. He's going to apply that DC amount to those taxable transfers that he made in 2024 to following Wanda's death. And then once he completes that schedule C, he's going to roll that new applicable credit amount forward onto page one of his gift tax return. If he wasn't filing a gift, an amended return, I would say, you know, just hold off and then report that D.C. amount on a 2025 gift tax return. Because we, we had mentioned that Harry was or had made taxable gifts in 2020, 2025. So he was going to file a 25, 2025 return anyhow. Okay. Now moving along to our next issue. This is a pebble size problem. And this is a transfer to an irrevocable trust that only Harry was the transfer. Or so this transfer was made in 2024 following Wanda's death. We called it 501 Trust. That's because we had two grandchildren who had a present interest in this trust along with a 501 tax exempt organization. And the problem here is that the transfer was reported under the wrong part to schedule A. So this trust was treated as a direct skip by the preparer. So it was reported under schedule A, part 2. But if you look at the terms of this trust, the individuals or the persons who have a permissible current right to receive income or principal are grandchildren and a 501c4 tax exempt organization. And so under 2652we only ignore those persons or those entities that are described under 2055A. 2055 is our estate tax charitable deduction provision. And 2055A pulls in only 501 orgs and 501 organizations. It's those organizations whose interests are ignored under 2652. And so as a result, this 501 is a permissible current recipient of income or principal and their interest should be respected. Therefore, this transfer should not have been categorized as a direct direct skip because you have a non Skip person, this 501c4 organization that has an interest in this irrevocable trust. And so as a result, this transfer should have been reported under schedule A, part three, an indirect skip or other transfers in trust. So what is the fix? Well, on an amended return, Harry should now report that transfer under schedule A, part three. But the issue is going to be the allocation of GST exemption. This trust essentially is a GST trust. There's no exception to that definition under 2,632. And so there would have been GST exemption that would have been automatically allocated to this trust. And so now Harry is faced with a decision as to if he did not want GST exemption automatically allocated, then there might be a relief provision that is available for him to go back and actually affirmatively allocate GST exemption to opt out and not have GST exemption automatically allocated. And that's under 2642, which I'll talk about in just a minute. Our next transfer that was incorrectly reported is we considered it a cobblestone. So now we're kind of moving up in the degree of complexity or severity of the problem. Harry and Wanda, before Wanda's death, made a transfer to a slat and they decided to make the split gift election. So on their returns they elected to split this gift. And the problem here is the trust at issue. The beneficiaries of the slat are Wanda, so the consenting spouse here and Harry and Wanda's descendants. And they, the trustee can make distributions of principal and income to Wanda and descendants pursuant to a non ascertainable standard. So as the trustee deems necessary. And so as a result, the interests of the third parties in this case, the descendants cannot be ascertained at the time of the transfer and hence severed from the interest of Wanda, the consenting spouse. And so there was no portion of this transfer that was eligible for gift splitting election under 2513. And so Harry should have been the only donor for gift tax purposes. And also for GST purposes, he should have been the only transferor. But what they did on their 2024 gift tax returns was that they did a 50, 50 split of the amount transferred for gift tax purposes and they did a 50, 5050 split for GST purposes, treating Harry as the transferor of 50% of that entire transfer and Wanda being the transferor of the remaining 50%. That is incorrect. There are some people who take the position or they think that because there's ambiguity in the regulations under 2652, that since it doesn't say specifically that you need to have a valid election under 2513, then even though you have a transfer for gift that can't be split for gift tax purposes, even if you make the election, then you get the 5050 split for GST purposes. I don't read the reg in that manner. I think that you need some portion to be split for gift tax Purposes in order to have that 5050 split for GST. So they should go back, file amended returns for for both Harry and Wanda and had the entire amount of the transfer treated as Harry as the donor for gift tax purposes and the entire amount of the transfer for GST purposes having Harry as our transferor. Okay, Our next transfer that we highlighted is in the category of a cobblestone as well. And this was a transfer by Harry to an irrevocable descendants trust. This was after Wanda's death and so he is the only donor. The problem here is that this descendants trust there was an inadvertent election that was made with respect to the GST automatic allocation rules and so on Harry's 2024 gift tax return there was actually an election out. So there was an opt out from the automatic allocation rules. That's not what Harry wanted. Harry actually wanted GST exemption to be allocated. This trust is essentially a gst trust under 2632. But unfortunately we had this inadvertent opt out election. So what is the fix here? The fix would be 2642 and now those final regulations under 2642 7. And so this is going to allow Harry to kind of go back and seek relief to actually make an allocation of GST exemption to this trust and have it treated as if it were timely made. The best thing about this is that Harry's return was timely filed. It was filed on 4, 15, 2025. There is a six month extension period that is going to apply an automatic six month extension period. And so as long as Harry kind of goes back and files a supplemental return and allocates affirmatively allocates GST exemption to this trust, then he is not going to have to file a PLR and he's not going to have to pay a user fee. And that's because our final regs now, which were released in May of last year 2024 basically say that or they don't include the statement that was made in the proposed regs that relief is not available to revoke an election under 2632 or 2632. That statement is no longer there. And so Harry has essentially a mechanism to kind of undo that inadvertent election. And the way to undo that would be to go back a manual allocation of GST exemption. And then lastly, that final transfer that I'm going to talk about has to do with a botched late allocation of GST exemption that was made by Harry to a trust that he created in 2020. This is now A kind of a Boulder sized problem. And the reason that this late allocation was botched was because the special election rule was elected on Harry's return. So valuing the assets as of the first of a desired or chosen month, the month that was selected was March 1st of 2024. And this trust had a value of $500,000. But in order for this rule to apply, and it's for valuation purposes only, Harry would have needed to have filed his return in making this late allocation by the end of March. That was not done. He actually filed his return on April 15, 2025. And so now the value of this trust, for purposes of computing the applicable fraction of the trust is not the value as of March 1st, but it's going to be the value of this trust on the date of allocation. So the date that the return was actually filed, which was $415,000. So in that case, our value on $415,000 was $600,000. But he had made an allocation of exactly $500,000 of GST exemption to this trust. There was no formular allocation. So now he ends up with an inclusion ratio of 0.167. So this is kind of a Boulder sized problem. He has to now file another return and make another late allocation of exemption to produce an inclusion ratio of zero. So those are my five problems or issues that I went through during our session in June. And I'm going to turn this now back over to Travis.