As part of ThinkAdvisor’s Special Report, 21 Days of Tax Planning Advice for 2014, throughout the month of March, we are partnering with our Summit Professional Networks sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format.
Can arrangements for payment of the proceeds of life insurance and annuity contracts attract the generation-skipping transfer tax?
Yes. Regardless of what form an arrangement may take (whether, for example, the arrangement is a life insurance trust, an agreement with the insurer for payment of proceeds under settlement options, or an outright payment to a beneficiary), if an insured (or annuitant) transfers benefits to a “skip person,” generally, the insured has made a generation-skipping transfer.
For purposes of the generation-skipping transfer tax, the term “trust” includes any arrangement (such as life estates, estates for years, and insurance and annuity contracts) other than an estate that, although not a trust, has substantially the same effect as a trust. In the case of an arrangement that is not a trust but that is treated as a trust, the term “trustee” means the person in actual or constructive possession of the property subject to such arrangement.
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The IRS has been given authority to issue regulations that may modify the generation-skipping rules when applied to trust equivalents, such as life estates and remainders, estates for years, and insurance and annuity contracts. The committee report states that such authority, for example, might be used to provide that the beneficiary of an annuity or insurance contract be required to pay any GST tax.
Regulations provide that the executor is responsible for filing and paying the GST tax if (1) a direct skip occurs at death, (2) the property is held in a trust arrangement, which includes arrangements having the same effect as an explicit trust, and (3) the total value of property subject to the direct skip is less than $250,000. The executor is entitled to recover the GST tax attributable to the transfer from the trustee (if the property continues to be held in trust) or from the recipient of the trust property (if transferred from the trust arrangement).
Regulations provide a number of examples that treat insurance proceeds as a trust arrangement. Where insurance proceeds held by an insurance company are to be paid to skip persons in a direct skip at death (a direct skip can occur whether proceeds are paid in a lump sum or over a period of time) and the aggregate value of such proceeds held by the insurer is less than $250,000, the executor is responsible for filing and paying the GST tax. Consequently, the insurance company can pay out the proceeds without regard to the GST tax (apparently, the insurance company could not do so if the executor attempts to recover the GST tax while the company still holds proceeds). When the value of the proceeds in the aggregate equals or exceeds $250,000, however, the insurance company is responsible for filing and paying the GST tax.
Can the transfer to an irrevocable life insurance trust of an amount used to make premium payments qualify for the generation-skipping transfer tax annual exclusion?