Gifts Subject to Both Gift and GST Taxes

Direct Skip

The GST tax you must report on Form 709 is that imposed only on inter vivos direct skips. An inter vivos direct skip is a gift that (a) is subject to the gift tax, (b) is an interest in property, and (c) is made to a skip person. All three requirements must be met before the gift is subject to the GST tax.

A gift is subject to the gift tax if you are required to list it on Schedule A of Form 709 (as described above). However, if you make a nontaxable gift (which is a direct skip) to a trust for the benefit of an individual, this transfer is also subject to the GST tax unless:

1. During the lifetime of the beneficiary, no corpus or income may be distributed to anyone other than the beneficiary and
2. If the beneficiary dies before the termination of the trust, the assets of the trust will be included in the gross estate of the beneficiary.

Note:   If the property transferred in the direct skip would have been includible in the donor's estate if the donor had died immediately after the transfer, see Transfers Subject to an Estate Tax Inclusion Period on page 2.

To determine if a gift is of an interest in property and is made to a skip person, you must first determine if the donee is a natural person or a trust as defined below.

Trust

For purposes of the GST tax, trust includes not only an explicit trust, but also any other arrangement (other than an estate) that although not explicitly a trust, has substantially the same effect as a trust. For example, trust includes life estates with remainders, terms for years, and insurance and annuity contracts. A transfer of property that is conditional on the occurrence of an event is a transfer in trust.

Interest in Property

If a gift is made to a natural person, it is always considered a gift of an interest in property for purposes of the GST tax.

If a gift is made to a trust, a natural person will have an interest in the property transferred to the trust if that person either has a present right to receive income or corpus from the trust (such as an income interest for life) or is a permissible current recipient of income or corpus from the trust (e.g., possesses a general power of appointment).

Skip Person

A donee who is a natural person is a skip person if that donee is assigned to a generation that is two or more generations below the generation assignment of the donor. See Determining the Generation of a Donee on page 7.

A donee that is a trust is a skip person if all the interests in the property transferred to the trust (as defined above) are held by skip persons.

A trust will also be a skip person if there are no interests in the property transferred to the trust held by any person, and future distributions or terminations from the trust can be made only to skip persons.

Nonskip Person

A nonskip person is any donee who is not a skip person.

Determining the Generation of a Donee

Generally, a generation is determined along family lines as follows:

1. If the donee is a lineal descendant of a grandparent of the donor (e.g., the donor's cousin, niece, nephew, etc.), the number of generations between the donor and the descendant (donee) is determined by subtracting the number of generations between the grandparent and the donor from the number of generations between the grandparent and the descendant (donee).
2. If the donee is a lineal descendant of a grandparent of a spouse (or former spouse) of the donor, the number of generations between the donor and the descendant (donee) is determined by subtracting the number of generations between the grandparent and the spouse (or former spouse) from the number of generations between the grandparent and the descendant (donee).
3. A person who at any time was married to a person described in 1 or 2 above is assigned to the generation of that person. A person who at any time was married to the donor is assigned to the donor's generation.
4. A relationship by adoption or half-blood is treated as a relationship by whole-blood.
5. A person who is not assigned to a generation according to 1, 2, 3, or 4 above is assigned to a generation based on his or her birth date as follows:
   1. A person who was born not more than 12½ years after the donor is in the donor's generation.
   2. A person born more than 12½ years, but not more than 371/2 years, after the donor is in the first generation younger than the donor.
   3. Similar rules apply for a new generation every 25 years.

If more than one of the rules for assigning generations applies to a donee, that donee is generally assigned to the youngest of the generations that would apply.

If an estate or trust, partnership, corporation, or other entity (other than certain charitable organizations and trusts described in sections 511(a)(2) and 511(b)(2) and governmental entities) is a donee, then each person who indirectly receives the gift through the entity is treated as a donee and is assigned to a generation as explained in the above rules.

Charitable organizations and trusts described in sections 511(a)(2) and 511(b)(2) and governmental entities are assigned to the donor's generation. Transfers to such organizations are therefore not subject to the GST tax. These gifts should always be listed in Part 1 of Schedule A.

Charitable Remainder Trusts

Gifts in the form of charitable remainder annuity trusts, charitable remainder unitrusts, and pooled income funds are not transfers to skip persons and therefore are not direct skips. You should always list these gifts in Part 1 of Schedule A even if all of the life beneficiaries are skip persons.

Generation Assignment Where Intervening Parent Is Dead

If you made a gift to your grandchild and at the time you made the gift, the grandchild's parent (who is your or your spouse's or your former spouse's child) is dead, then for purposes of generation assignment, your grandchild is considered to be your child rather than your grandchild. Your grandchild's children will be treated as your grandchildren rather than your great-grandchildren.

This rule is also applied to your lineal descendants below the level of grandchild. For example, if your grandchild is dead, your great-grandchildren who are lineal descendants of the dead grandchild are considered your grandchildren for purposes of the GST tax.

This special rule may also apply in other cases of the death of a parent of the transferee. Beginning with gifts made in 1998, the existing rule that applies to grandchildren of the decedent has been extended to apply to other lineal descendants.

If property is transferred to an individual who is a descendant of a parent of the transferor and that individual's parent (who is a lineal descendant of the parent of the transferor) is dead at the time the transfer is subject to gift or estate tax, then for purposes of generation assignment, the individual is treated as if he or she is a member of the generation that is one generation below the lower of:

• the transferor's generation or
• the generation assignment of the youngest living ancestor of the individual who is also a descendant of the parent of the transferor.

The same rules apply to the generation assignment of any descendant of the individual.

This rule does not apply to a transfer to an individual who is not a lineal descendant of the transferor if the transferor has any living lineal descendants.

If any transfer of property to a trust would have been a direct skip except for this generation assignment rule, then the rule also applies to transfers from the trust attributable to such property.

Examples

The generation-skipping transfer rules can be illustrated by the following examples:

Example 1.   You give your house to your daughter for her life with the remainder then passing to her children. This gift is made to a trust even though there is no explicit trust instrument. The interest in the property transferred (the present right to use the house) is transferred to a nonskip person (your daughter). Therefore, the trust is not a skip person because there is an interest in the transferred property that is held by a nonskip person. The gift is not a direct skip and you should list it in Part 1 of Schedule A. (However, on the death of the daughter, a termination of her interest in the trust will occur that may be subject to the generation-skipping transfer tax. See the instructions for line 5, Part 2, Schedule C (on page 11) for a discussion of how to allocate GST exemption to such a trust.)

Example 2.   You give $100,000 to your grandchild. This gift is a direct skip that is not made in trust. You should list it in Part 2 of Schedule A.

Example 3.   You establish a trust that is required to accumulate income for 10 years and then pay its income to your grandchildren for their lives and upon their deaths distribute the corpus to their children. Because the trust has no current beneficiaries, there are no present interests in the property transferred to the trust. All of the persons to whom the trust can make future distributions (including distributions upon the termination of interests in property held in trust) are skip persons (i.e., your grandchildren and great-grandchildren). Therefore, the trust itself is a skip person and you should list the gift in Part 2 of Schedule A.

Example 4.   You establish a trust that pays all of its income to your grandchildren for 10 years. At the end of 10 years, the corpus is to be distributed to your children. Since for this purpose interests in trusts are defined only as present interests, all of the interests in this trust are held by skip persons (the children's interests are future interests). Therefore, the trust is a skip person and you should list the entire amount you transferred to the trust in Part 2 of Schedule A even though some of the trust's ultimate beneficiaries are nonskip persons.

Part 1 - Gifts Subject Only to Gift Tax

List gifts subject only to the gift tax in Part 1. Generally, all of the gifts you made to your spouse (that are required to be listed, as described earlier), to your children, and to charitable organizations are not subject to the GST tax and should, therefore, be listed only in Part 1.

Group the gifts in four categories: gifts made to your spouse; gifts made to third parties that are to be split with your spouse; charitable gifts (if you are not splitting gifts with your spouse); and other gifts. If a transfer results in gifts to two or more individuals (such as a life estate to one with remainder to the other), list the gift to each separately.

Number and describe all gifts (including charitable, public, and similar gifts) in the columns provided in Schedule A. Describe each gift in enough detail so that the property can be easily identified, as explained below.

For real estate provide:

• A legal description of each parcel;
• The street number, name, and area if the property is located in a city; and
• A short statement of any improvements made to the property.

For bonds, give:

• The number of bonds transferred;
• The principal amount of each bond;
• Name of obligor;
• Date of maturity;
• Rate of interest;
• Date or dates when interest is payable;
• Series number if there is more than one issue;
• Exchanges where listed or, if unlisted, give the location of the principal business office of the corporation; and
• CUSIP number. The CUSIP number is a nine-digit number assigned by the American Banking Association to traded securities.

For stocks:

• Give number of shares;
• State whether common or preferred;
• If preferred, give the issue, par value, quotation at which returned, and exact name of corporation;
• If unlisted on a principal exchange, give location of principal business office of corporation, state in which incorporated, and date of incorporation;
• If listed, give principal exchange; and
• CUSIP number.

For interests in property based on the length of a person's life, give the date of birth of the person.

For life insurance policies, give the name of the insurer and the policy number.

Clearly identify in the description column which gifts create the opening of an estate tax inclusion period (ETIP) as described under Transfers Subject to an Estate Tax Inclusion Period on page 2. Describe the interest that is creating the ETIP. You may not allocate the GST exemption to these transfers until the close of the ETIP. See the instructions for Schedule C beginning on page 10.

Donor's Adjusted Basis of Gifts

Show the basis you would use for income tax purposes if the gift were sold or exchanged. Generally, this means cost plus improvements, less applicable depreciation, amortization, and depletion.

For more information on adjusted basis, see Pub. 551, Basis of Assets.

Date and Value of Gift

The value of a gift is the fair market value of the property on the date the gift is made. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, when neither is forced to buy or to sell, and when both have reasonable knowledge of all relevant facts. Fair market value may not be determined by a forced sale price, nor by the sale price of the item in a market other than that in which the item is most commonly sold to the public. The location of the item must be taken into account wherever appropriate.

The fair market value of a stock or bond (whether listed or unlisted) is the mean between the highest and lowest selling prices quoted on the valuation date. If only the closing selling prices are available, then the fair market value is the mean between the quoted closing selling price on the valuation date and on the trading day before the valuation date. To figure the fair market value if there were no sales on the valuation date, see the instructions for Schedule B of Form 706.

Stock of close corporations or inactive stock must be valued on the basis of net worth, earnings, earning and dividend capacity, and other relevant factors.

Generally, the best indication of the value of real property is the price paid for the property in an arm's-length transaction on or before the valuation date. If there has been no such transaction, use the comparable sales method. In comparing similar properties, consider differences in the date of the sale, and the size, condition, and location of the properties, and make all appropriate adjustments.

The value of all annuities, life estates, terms for years, remainders, or reversions is generally the present value on the date of the gift.

Sections 2701 and 2702 provide special valuation rules to determine the amount of the gift when a donor transfers an equity interest in a corporation or partnership (section 2701) or makes a gift in trust (section 2702). The rules only apply if, immediately after the transfer, the donor (or an applicable family member) holds an applicable retained interest in the corporation or partnership, or retains an interest in the trust. For details, see sections 2701 and 2702, and their regulations.

Supplemental Documents

To support the value of your gifts, you must provide information showing how it was determined.

For stock of close corporations or inactive stock, attach balance sheets, particularly the one nearest the date of the gift, and statements of net earnings or operating results and dividends paid for each of the 5 preceding years.

For each life insurance policy, attach Form 712, Life Insurance Statement.

Note for single premium or paid-up policies:   In certain situations, for example, where the surrender value of the policy exceeds its replacement cost, the true economic value of the policy will be greater than the amount shown on line 59 of Form 712. In these situations, report the full economic value of the policy on Schedule A. See Rev. Rul. 78-137, 1978-1 C.B. 280 for details.

If the gift was made by means of a trust, attach a certified or verified copy of the trust instrument to the return on which you report your first transfer to the trust. However, to report subsequent transfers to the trust, you may attach a brief description of the terms of the trust or a copy of the trust instrument.

Also attach any appraisal used to determine the value of real estate or other property.

If you do not attach this information, you must include in Schedule A full information to explain how the value was determined.

Part 2 - Gifts That are Direct Skips and are Subject to Both Gift Tax and Generation-Skipping Transfer Tax

List in Part 2 only those gifts that are subject to both the gift and GST taxes. You must list the gifts in Part 2 in the chronological order that you made them. Number, describe, and value the gifts as described in the instructions for Part 1 on page 8.

If you made a gift in trust, list the entire gift as one line entry in Part 2. Enter the entire value of the property transferred to the trust even if the trust has nonskip person future beneficiaries.

How to report GST transfers after the close of an ETIP.   If you are reporting a generation-skipping transfer that was subject to an estate tax inclusion period (ETIP) (provided the ETIP closed as a result of something other than the death of the transferor - see Form 706), and you are also reporting gifts made during the year, complete Schedule A as you normally would with the following changes:

Report the transfer subject to an ETIP on Schedule A, Part 2.

1. Column B. In addition to the information already requested, describe the interest that is closing the ETIP; explain what caused the interest to terminate; and list the year the gift portion of the transfer was reported and its item number on Schedule A that was originally filed to report the gift portion of the ETIP transfer.
2. Column D. Give the date the ETIP closed rather than the date of the initial gift.
3. Column E. Enter N/A in Column E.

The value is entered only in Column B of Part 1, Schedule C. See page 10 of the instructions.

Part 3 - Taxable Gift Reconciliation

If you have made no gifts yourself and are filing this return only to report gifts made by your spouse but which are being split with you, skip lines 1-3 and enter your share of the split gifts on line 4.

Line 2

If you are not splitting gifts with your spouse, skip this line and enter the amount from line 1 on line 3. If you are splitting gifts with your spouse, show half of the gifts you made to third parties on line 2. On the dotted line indicate which numbered items from Parts 1 and 2 of Schedule A you treated this way. Generally, if you elect to split your gifts, you must split all gifts made by you and your spouse to third-party donees. The only exception is if you gave your spouse a general power of appointment over a gift you made.

Line 4

If you are not splitting gifts, skip this line and go to line 5. If you gave all of the gifts, and your spouse is only filing to show his or her half of those gifts, you need not enter any gifts on line 4 of your return or include your spouse's half anywhere else on your return. Your spouse should enter the amount from Schedule A, line 2, of your return on Schedule A, line 4, of his or her return.

If both you and your spouse make gifts for which a return is required, the amount each of you shows on Schedule A, line 2, of his or her return must be shown on Schedule A, line 4, of the other's return.

Line 6

Enter the total annual exclusions you are claiming for the gifts listed on Schedule A (including gifts listed on line 4). See Annual Exclusion on page 3. If you split a gift with your spouse, the annual exclusion you claim against that gift may not be more than your half of the gift.

Deductions

Line 8

Enter on line 8 all of the gifts to your spouse that you listed on Schedule A and for which you are claiming a marital deduction. Do not enter any gift that you did not include on Schedule A. On the dotted line on line 8, indicate which numbered items from Schedule A are gifts to your spouse for which you are claiming the marital deduction.

Do not enter on line 8 any gifts to your spouse who was not a U.S. citizen at the time of the gift.

You may deduct all gifts of nonterminable interests made during this time that you entered on Schedule A regardless of amount, and certain gifts of terminable interests as outlined below.

Terminable interests.   Generally, you cannot take the marital deduction if the gift to your spouse is a terminable interest. In most instances, a terminable interest is nondeductible if someone other than the donee spouse will have an interest in the property following the termination of the donee spouse's interest. Some examples of terminable interests are:

• A life estate;
• An estate for a specified number of years; or
• Any other property interest that after a period of time will terminate or fail.

If you transfer an interest to your spouse as sole joint tenant with yourself or as a tenant by the entirety, the interest is not considered a terminable interest just because the tenancy may be severed.

Life estate with power of appointment.   You may deduct, without an election, a gift of a terminable interest if all four requirements below are met:

1. Your spouse is entitled for life to all of the income from the entire interest;
2. The income is paid yearly or more often;
3. Your spouse has the unlimited power, while he or she is alive or by will, to appoint the entire interest in all circumstances; and
4. No part of the entire interest is subject to another person's power of appointment (except to appoint it to your spouse).

If either the right to income or the power of appointment given to your spouse pertains only to a specific portion of a property interest, the marital deduction is allowed only to the extent that the rights of your spouse meet all four of the above conditions. For example, if your spouse is to receive all of the income from the entire interest, but only has a power to appoint one-half of the entire interest, then only one-half qualifies for the marital deduction.

A partial interest in property is treated as a specific portion of an entire interest only if the rights of your spouse to the income and to the power constitute a fractional or percentile share of the entire property interest. This means that the interest or share will reflect any increase or decrease in the value of the entire property interest. If the spouse is entitled to receive a specified sum of income annually, the capital amount that would produce such a sum will be considered the specific portion from which the spouse is entitled to receive the income.

Election to deduct qualified terminable interest property (QTIP).   You may elect to deduct a gift of a terminable interest if it meets requirements 1, 2, and 4 above, even though it does not meet requirement 3.

You make this election simply by listing the qualified terminable interest property on Schedule A and deducting its value on line 8, Part 3, Schedule A. There is no longer a box to check to make the election. You are presumed to have made the election for all qualified property that you both list and deduct on Schedule A. You may not make the election on a late filed Form 709.

Line 9

Enter the amount of the annual exclusions that were claimed for the gifts you listed on line 8.

Line 11

You may deduct from the total gifts made during the calendar year all gifts you gave to or for the use of:

• The United States, a state or political subdivision of a state or the District of Columbia, for exclusively public purposes;
• Any corporation, trust, community chest, fund, or foundation organized and operated only for religious, charitable, scientific, literary, or educational purposes, or to prevent cruelty to children or animals, or to foster national or international amateur sports competition (if none of its activities involve providing athletic equipment (unless it is a qualified amateur sports organization)), as long as no part of the earnings benefits any one person, no substantial propaganda is produced, and no lobbying or campaigning for any candidate for public office is done;
• A fraternal society, order, or association operating under a lodge system, if the transferred property is to be used only for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals;
• Any war veterans' organization organized in the United States (or any of its possessions), or any of its auxiliary departments or local chapters or posts, as long as no part of any of the earnings benefits any one person.

On line 11, show your total charitable, public, or similar gifts (minus annual exclusions allowed). On the dotted line, indicate which numbered items from the top of Schedule A (or line 4) are charitable gifts.

Line 14

If you will pay GST tax with this return on any direct skips reported on this return, the amount of that GST tax is also considered a gift and must be added to your other gifts reported on this return.

If you entered gifts on Part 2, or if you and your spouse elected gift splitting and your spouse made gifts subject to the GST tax that you are required to show on your Form 709, complete Schedule C, and enter on line 14 the total of Schedule C, Part 3, column H. Otherwise, enter zero on line 14.

Line 17

Section 2523(f)(6) creates an automatic QTIP election for gifts of joint and survivor annuities where the spouses are the only possible recipients of the annuity prior to the death of the last surviving spouse.

The donor spouse can elect out of QTIP treatment, however, by checking the box on line 17 and entering the item number from Schedule A for the annuities for which you are making the election. Any annuities entered on line 17 cannot also be entered on line 8 of Schedule A, Part 3. Any such annuities that are not listed on line 17 must be entered on line 8 of Part 3, Schedule A. If there is more than one such joint and survivor annuity, you are not required to make the election for all of them. Once made, the election is irrevocable.

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