ARTICLE

New Generation-Skipping Transfer Tax Rules Create A Trap For The Unwary

We would like to alert you to a potential problem that has been created by a recent change to the generation-skipping transfer tax (“GSTT”) rules made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “2001 Tax Act”). This change in the law may require that you take action before April 15, 2002.

As you may know, every taxpayer has a $1 million lifetime exemption available to offset generation-skipping transfers that would otherwise be subject to the GSTT. Certain generation-skipping transfers will also qualify for an annual GSTT exclusion in the amount of $11,000 per transferee, which does not consume any part of the lifetime exemption. Some of you may be using annual GSTT exclusions to offset gifts you make to irrevocable trusts having both skip persons (that is, people at least two generations younger) and non-skip persons as beneficiaries. Life insurance trusts are a common example of such trusts.

The 2001 Tax Act provides for automatic allocation of your lifetime exemption to transfers to such trusts that are made at any time after December 31, 2000. Such an allocation may cause you to waste GSTT exemption on gifts that would otherwise be covered by your annual GSTT exclusion. There may be other circumstances under which you will not want automatic allocation to apply.

Fortunately, the law allows you to opt out of automatic allocation, either for the current tax year only or for all years. The opt-out election must be made on a timely-filed gift tax return for the first year in question (or for each year, if you choose to opt out year by year). Therefore, if you wish to opt out of automatic allocation for gifts made during 2001, you must do so on a gift tax return filed no later than April 15, 2002.

If you have made any transfers to an irrevocable trust after December 31, 2000, we suggest that you contact us, or your accountant or other tax advisor, to determine how to proceed regarding the automatic allocation of GSTT exemption.