Wednesday, November 28, 2007
The following is from Robert L. Moshman, Esq., GST Grandfathering Debated, Est. Analyst (Oct. 2007):
The Benjamin Gerson Trust became irrevocable when Mr. Gerson died in 1973. Mr. Gerson left a $22-million estate for which $7.16 million of estate tax was owed. Marital Trust A, containing $6.24 million, was subject to a power of appointment that Mrs. Gerson exercised in her will on behalf of five grandchildren. At her death in 2000, Trust A was distributed to two of the grandchildren outright and to three others in trust until they were to turn 40.
Since Mrs. Gerson held a general power of appointment over property at death, the value of such property was includible in her gross estate for Federal estate tax purposes under section 2041.
The IRS treated the transfer to the grandchildren as direct skip transfers coming from Mrs. Gerson and therefore assessed a tax deficiency of $1.14 million based on the GST tax.***
[T]he IRS*** found that the lapse of a general power of appointment resulted in a “constructive” addition to the trust and was therefore subject to GST tax.
The estate argued that the transfer was grandfathered as a transfer from a trust that was irrevocable prior to October 22, 1986, under section 1433(b)(2)(A) of the Tax Reform Act of 1986[.]***
[A] divided tax court sided with the IRS and noted that Congress used the transitional rule to apply to trusts involving a specific volitional generation-skipping transfer and not a general power of appointment. Also, there was congressional intent to provide uniformity in GST tax application.