NEW RULES FOR ALLOCATING GENERATION-SKIPPING TRANSFER TAX EXEMPTION

by Laurelle Gutierrez-Lundquist, Esq.^*

I. INTRODUCTION

The Economic Growth and Tax Relief Reconciliation Act¹ (the "Act"), signed into law by President Bush on June 7, 2001, has been the subject of much debate among estate planning and tax professionals since its enactment. Many are concerned with how to plan for some of the major changes brought about by the Act, including the increasing estate and generation-skipping transfer ("GST") tax exemption amounts, the decreasing top estate and GST tax rates, the one-year repeal of the federal estate and GST taxes, the possible reinstatement in 2011 of the pre-Act federal estate and GST tax laws, and the new carry-over basis regime. Many of the major provisions of the Act phase in over time or are not effective for several years. The provisions of the Act affecting the GST exemption amount and the eventual repeal of the GST tax are not effective until January 1, 2004 and January 1, 2010, respectively. Nonetheless, several important provisions of the Act concerning the allocation of GST exemption went into effect on January 1, 2001.

One such provision involves the new rules concerning the automatic allocation of GST exemption.² While the new automatic allocation rules are intended to help taxpayers avoid mistakenly failing to allocate GST exemption, these rules also potentially cause the wasting of GST exemption. The automatic allocation of GST exemption to transfers that are not, and were never intended to be, generation-skipping transfers can wreak havoc on estate plans that have been carefully designed to apply the taxpayer’s full GST exemption to other transfers. This article discusses the new automatic GST exemption allocation rules, how to avoid the unnecessary wasting of unused GST exemption, and the retroactive allocation of GST exemption that can assist a taxpayer in minimizing the impact of the GST tax.