Form 709 is required to be filed for transfers of assets to a foreign trust. Treas. Reg. § 25.2511-2(b) and
(j) requires the grantor of a trust to file a Form 709 even where transfers are not completed gifts.
Also, if you make a transfer to a person (in or outside of the U.S.) that is not for their medical or
educational expenses or payments to political organizations, or gifts to nonresident alien spouses in excess
of $103,000 per year, the gifts must be reported on Form 709. The filing of a gift tax return is technically
required even if the gift is eligible for the $11,000 annual gift tax exclusion for an individual or a split
gift of up to $22,000 by a husband and wife.
What Information Is Required?
The gift tax return is four pages, but in some cases it may require extensive attachments. The form
basically requires the disclosure of gifts that are in excess of the annual gift tax exclusion and gifts
that are subject to the generation skipping transfer tax. In some cases, a gift tax must be computed and
paid with the return.
When Is It Due?
The gift tax return is due by April 15th of the year following the year in which the gifts were made. An
extension to file the gift tax return can be made by requesting an extension of time to file your personal
income tax return.
Where Should It Be Filed?
The address to which the gift tax return should be filed varies with the taxpayer's state of residence and
is listed in the instructions to the Form 709.
How Long Does It Take To Prepare?
The IRS estimate of the average time required to prepare the gift tax return is about two hours, but they
also estimate that it will take an hour just to copy, assemble and mail the form to the IRS. Actually, the
required time varies greatly with the complexity and scope of the gifts that are being reported and whether
a gift tax is due with the return. In some cases, the valuation of the property that is being gifted will
take far more time than the actual preparation of the gift tax return.
Why Comply ? (Penalties)
Penalties are generally for the late filing of a return on which a tax is due and/or for the late payment of
any gift tax. If you can be sure that all gifts during the previous taxable year were either eligible for
the annual gift tax exclusion or that they would be exempt by virtue of the lifetime unified estate and gift
tax credit, then there is no financial penalty for a failure to file or for filing a late return.
Comments
Upon transferring cash to a foreign trust in order to acquire a variable life insurance policy or to pay
premiums, a gift tax return should be filed. The applicable exemption amount against any taxable gift and
the election to apply the exclusion against the generation-skipping transfer tax are reported on the gift
tax return.
Treas. Reg. § 25.2511-2(j) states that if the donor takes the position that a power of appointment is of
such a nature as to render a gift incomplete and, thus, not subject to the gift tax, the transaction "...
shall be disclosed in the return and evidence showing all relevant facts, including a copy of the instrument
of transfer, should be submitted." Treas. Reg. § 25.2511-2(b) provides that "... But, if upon a transfer of
property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be
wholly incomplete ... or partially incomplete".
For example, if a donor transfers property to another in trust to pay the income to the donor or accumulate
it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder
among his descendants, no portion of the transfer is a completed gift. On the other hand, if the donor had
not retained a testamentary power of appointment, but instead provided that the remainder should go to X or
his heirs, the entire gift would be a completed gift. Where a foreign grantor (asset protection) trust
includes the provision granting a testamentary (sometimes inter vivos) special power of appointment to
change the disposition of assets after the death of the grantor, the gift is incomplete for gift tax
purposes. The transfer of assets to a foreign non-grantor trust is a completed gift.
The transfer of appreciated property by a U. S. person to a foreign grantor trust is not subject to any
recognition of gain since the U. S. person is treated as the owner. However, if a U. S. person transfers
appreciated property to a foreign non-grantor trust, the transfer is treated as a sale or exchange and gain
is recognized equal to the excess of the fair market value over the adjusted base of the property. Gain is
recognized because the grantor of a foreign non-grantor trust is not treated as the owner of the trust
assets.
