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Gift-splitting and GRATs

On Behalf of | Nov 5, 2015 | Estate Taxes

Georgia residents with high-asset estates often use the gift-splitting election in order to remove assets from their estates’ values. The IRS allows spouses to split their annual gifts which helps them to double the exclusion they would have otherwise enjoyed. A recent case demonstrates potential issues with taking the gift-splitting election for gifts made to fund grantor retained annuity trusts, however.

In the case, the husband formed two GRATs initially, and he and his wife then took the gift-splitting election to fund them with the wife’s signed consent. Later, he established two more GRATs, and the couple did the same as they had previously.

With all four established GRATs, the trust beneficiary was the man’s wife. In reviewing the couple’s taking the gift-splitting election for the gifts they made to the GRATs, the IRS ruled that, because the trust beneficiary was the wife, the couple could not do so. Gifts must be made to third parties. The IRS did indicate that the man could take his own gift exclusion but the wife could not. Since two of the GRATs were beyond the reach of the statute of limitations, the IRS ruled only the last two that were established would have the rule applied.

Estate planning attorneys can often help their clients reduce taxes they would otherwise incur on their estates. They may also help them draft a variety of different types of trusts in order to remove assets from their estates to reduce the overall value. In order to help their clients to be able to take the gift-splitting election, they may help them identify an appropriate third party to name as the beneficiary of a GRAT.