882 / What is the estate tax inclusion period (ETIP) for GST tax purposes?

Example. Grantor sets up an irrevocable trust: income retained for 10 years, then life estate for children, followed by remainder to grandchildren. The valuation of property for purpose of the inclusion rule is delayed until the earlier of the expiration of the 10-year period or the transferor’s death. If the grantor were to die during such time the property would be included in the grantor’s estate under IRC Section 2036(a) (see Q 824). However, if the grantor survived the 10-year period and failed to make an allocation of the exemption on a timely filed gift tax return, the determination of value is postponed until the earlier of the time an allocation is filed or death.

Except as provided in regulations, for purpose of the GST tax exemption allocation rules, any reference to an individual or a transferor is generally treated as including the spouse of such individual or transferor.² Thus, an ETIP includes the period during which, if death occurred, the property being transferred would be included in the estate (other than by reason of the gifts within three years of death rule of IRC Section 2035) of the transferor or the spouse of the transferor. The property is not considered as includable in the estate of the transferor or the spouse of the transferor if the possibility of inclusion is so remote as to be negligible (i.e., less than a 5 percent actuarial probability). The property is not considered as includable in the estate of the spouse of the transferor by reason of a withdrawal power limited to the greater of $5,000 or 5 percent of the trust corpus if the withdrawal power terminates no later than 60 days after the transfer to trust. Apparently, the ETIP rules do not apply if a reverse QTIP election (see Q 885) is made. The ETIP terminates on the earlier of (1) the death of the transferor; (2) the time at which no portion would be includable in the transferor’s estate (other than by reason of IRC Section 2035) or, in the case of the spouse who consents to a split-gift, the time at which no portion would be includable in the other spouse’s estate; (3) the time of the GST (but only with respect to property involved in the GST); or (4) in the case of an ETIP arising because of an interest or power held by the transferor’s spouse, at the earlier of (a) the death of the spouse, or (b) the time at which no portion would be includable in the spouse’s estate (other than by reason of IRC Section 2035).³

Example. Grantor sets up an irrevocable trust: income retained for the shorter of nine years or life, remainder to grandchild. Grantor and spouse elect to split the gift. If spouse dies during trust term, spouse’s executor can allocate GST exemption to spouse’s deemed one-half of the trust. However, the allocation is not effective until the earlier of the expiration of grantor’s income interest or grantor’s death.

The regulations provide that the election out of automatic allocation of GST exemption for either a direct skip or an indirect skip can be made at any time up until the due date for filing the gift tax return for the year the ETIP ends. If the transfer subject to an ETIP occurred in an earlier year, the election must specify the particular transfer. An affirmative allocation of GST exemption cannot be revoked after the due date for filing the gift tax return for the year the affirmative election is made (or after the allocation is made in the case of a late allocation), even where actual allocation is not effective until the end of an ETIP.⁴