The Internal Revenue Service has published final regulations that add more details to its interpretation of the “predeceased parent rule.”[@@]
The proposed regulation could affect financial advisors who are trying to help wealthy clients with complicated personal lives minimize exposure to generation-skipping transfer taxes.
GST taxes affect wealthy taxpayers who want to transfer assets to grandchildren, great-grandchildren and other lineal descendants.
One major section of the new final regulations affects grandchildren of a wealthy taxpayer who end up inheriting directly from the wealthy grandparent because their parents have died.
The new final regulations make it clear that the IRS will move the children up into their parents’ generation, for purposes of calculating GST taxes, and the IRS then will move up the children’s own lineal descendants up one generation, too, according to a team led by Lian Mito, an IRS official, that has published a discussion of the new regulations today in the Federal Register.
Another section of the regulations affects wealthy grandparents who avoid GST taxes by adopting grandchildren. In the past, the IRS has treated the adopted grandchildren as grandchildren of the wealthy adoptive parents. In the proposed regulations, the IRS said it would treat the adopted grandchildren as children if the children were under the age of 18 when they were adopted.
Now, in the final regulations, the IRS says it will treat adopted grandchildren as children for estate tax purposes if it can determine that the adoption was not done primarily for purposes of avoiding gift taxes or estate taxes.
Determination of whether an adoption was made for tax-avoidance purposes “is to be made based upon all of the facts and circumstances,” officials write in the discussion of the regulations that appears in the Federal Register.
The IRS believes “that the most significant factor to be considered is whether there is a bona fide parent/child relationship between the adoptive parent and the adopted individual,” officials write. “The adoption of an infant will be less likely to be considered primarily for tax-avoidance purposes than the adoption of an individual who is age 17. Objective evidence that the parent was unwilling or unable to act as the individual’s parent…may indicate that an adoption is not primarily for tax-avoidance purposes.”
The text of the final regulations is on the Web at http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/pdf/05-13799.pdf