Gift Tax Blunders: Common Mistakes on Form 709

“Gift Tax Blunders: Common Mistakes on Form 709,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is ACTEC Fellow Travis Hayes of Naples, Florida. Form 709, officially titled United States Gift and Generation Skipping Transfer Tax Return, is a tax form used by U.S. taxpayers to report gifts that exceed the annual exclusion amount, to elect gift splitting between spouses, and to allocate GST tax exemption to transfers.

ACTEC Fellow Steven M. Bonneau of Chicago, Illinois joins us today to review common mistakes made on Form 709 from pebble-sized problems to boulder-sized blunders. Welcome, Steve.

Overview of the Case Study and 5 Mock Mistakes

Steven M. Bonneau: Thanks, Travis. And hello, everyone. It’s a pleasure to be here today for this podcast. So I’m going to give you the kind of the cliff-note summary of our presentation that took place in June at the summer meeting. We had a detailed case study involving Harry and Wanda Grossu, Mr. and Mrs. “Big Bucks.”

I’m going to start with kind of the most benign or the smallest problem, and then kind of make our way through as those problems get bigger. As Travis kind of mentioned, we had different types of classifications for these problems. We used the imagery from our description when we used classification of sedimentary rock, and so we had grains of sand, pebbles, cobblestones, and boulders.

Grain of Sand Issue: Failure to Report DSUE

The first issue that I’m going to start with you today is going to be the failing to report Wanda, who is our deceased spouse. She died in 2024, halfway through 2024. The failure to report her DSUE amount (Deceased Spousal Unused Exclusion) on Harry’s timely filed 2024 gift tax return, it was filed on April 15th of this year. And at the time that that return was timely filed, Wanda’s estate tax return was not yet complete, it wasn’t filed, the DSUE amount was not yet determined. So as a result, his return was filed without reporting the DSUE amount.

That’s a very common situation. The fix to this issue, it’s very minor. It is a grain of sand. What you can do is one of two things. We knew that Harry was going to be filing an amended gift tax return. So, on that amended gift tax return, what we’re simply going to do is complete schedule C. We’re going to report the DSUE amount that he is receiving from Wanda. He is going to then kind of compute whatever the applicable credit amount is, which is going to take into account his basic exclusion and the DSUE, he’s going to apply that DSUE amount to those taxable transfers that he made in 2024, following Wanda’s death. And then once he completes that schedule C, he’s going to roll that new applicable credit amount forward onto page 1 of his gift tax return.

If he wasn’t filing a gift tax– an amended return– I would say, you know, just hold off and then report that DSUE amount on a 2025 gift tax return because we had mentioned that Harry was or had made taxable gifts in 2025, so he was going to file a 2025 return anyhow.

Pebble Issue: Misreporting a Transfer as a Direct Skip

Now moving on to our next issue, this is a pebble size problem. And this is a transfer to an irrevocable trust that only Harry was the transfer or, so this transfer was made in 2024, following Wanda’s death. We called it 501 trust, that’s because we had two grandchildren who had a present interest in this trust, along with a 501 tax exempt organization. And the problem here is that the transfer was reported under the wrong part to schedule A. So this trust was treated as a direct skip by the preparer, so it was reported under schedule A part 2.

But if you look at the terms of this trust, the individuals or the persons who have a permissible current right to receive income or principal are grandchildren and a 501(c)(4) tax exempt organization. Under 2652(c)(1b), we only ignore those persons or those entities that are described under 2055(a). 2055 is our estate tax charitable deduction provision. And 2055(a) pulls in only 501(c)(3) orgs and 501(c)(10) organizations; it’s those organizations whose interests are ignored under 2652(c).

As a result, this 501(c)(4) is a permissible current recipient of income or principal and their interests should be respected. Therefore, this transfer should not have been categorized as a direct skip because you have a non-skip person, this 501(c)(4) organization, that has an interest in this irrevocable trust. As a result, this transfer should have been reported under schedule A part 3, an indirect skip or other transfers in trust.

So, what is the fix? Well, on an amended return, Harry should now report that transfer under schedule A, part 3. But the issue is going to be the allocation of GST exemption. This trust essentially is a GST trust. There’s no exception to that definition under 2632(c). There would have been GST exemption that would have been automatically allocated to this trust. Now Harry is faced with the decision as to if he did not want GST exemption automatically allocated, then there might be a relief provision that is available for him to go back and actually affirmatively allocate GST exemption to opt out and not have GST exemption automatically allocated. And that’s under 2642(g)(1), which I’ll talk about in just a minute.

Cobblestone Issue: Improper Gift-Splitting in a SLAT

Our next transfer that was incorrectly reported is we considered it a cobblestone. Now we’re kind of moving up in the degree of complexity or severity of the problem. Harry and Wanda, before Wanda’s death, made a transfer to a SLAT and they decided to make the split gift elections. So on their returns, they elected to split this gift. And the problem here is the trust that issue. The beneficiaries of the SLAT are Wanda, so the consenting spouse here, and Harry and Wanda’s descendants. And the trustee can make distributions of principal and income to Wanda and descendants pursuing to a non-ascertainable standard, so as the trustee deems necessary.

As a result, the interests of the third parties, in this case, the descendants, cannot be ascertained at the time of the transfer and hence severed from the interest of Wanda, the consenting spouse. There was no portion of this transfer that was eligible for a gift splitting election under 2513. Harry should have been the only donor for gift tax purposes and also for GST purposes he should have been the only transferor. But what they did on their 2024 gift tax returns was that they did a 50-50 split of the amount transferred for gift tax purposes, and they did a 50-50 split for GST purposes, treating Harry as the transferor of 50% of that entire transfer and Wanda being the transferor of the remaining 50%. That is incorrect.

There are some people who take the position where they think that because there’s ambiguity in the regulations under 2652, that since it doesn’t say specifically that you need to have a valid election under 2513, then even though you have a transfer that can’t be split for gift tax purposes, even if you make the election, then you get the 50-50 split for GST purposes. I don’t read the reg in that manner. I think that you need some portion to be split for gift tax purposes in order to have that 50-50 split for GST. So, they should go back, file amended returns for both Harry and Wanda and have the entire amount of the transfer treated as Harry as the donor for gift tax purposes and the entire amount of the transfer for GST purposes, having Harry as our transferor.

Second Cobblestone Issue: Inadvertent Opt-Out of Automatic GST Allocation

Our next transfer that we highlighted is in the category of a cobblestone as well. And this was a transfer by Harry to an irrevocable descendants trust, this was after Wanda’s death, and so he is the only donor. The problem here is that this descendants trust, there was an inadvertent election that was made with respect to the GST automatic allocation rules. On Harry’s 2024 gift tax return, there was actually an election out. So there was an opt out from the automatic allocation rules. That’s not what Harry wanted. Harry actually wanted GST exemption to be allocated. This trust is essentially a GST trust under 2632(c) but unfortunately, we had this inadvertent opt out election.

So what is the fix here? The fix would be 2642(g)(1). And now those final regulations under 2642-7. This is going to allow Harry to kind of go back and seek relief to actually make an allocation of GST exemption to this trust and have it treated as if it were timely made. The best thing about this is that Harry’s return was timely filed, it was filed on 4/15/2025. There is a six-month extension period that is going to apply an automatic six-month extension period. And so as long as Harry kind of go back goes back and files a supplemental return and allocates affirmatively allocates to GST exemption to this trust, then he is not going to have to file a PLR and he’s not going to have to pay a user fee. And that’s because our final regs now, which were released in May of last year, 2024, basically say that- or they don’t include the statement that was made in the proposed regs that relief is not available to revoke an election under 2632(b)(3) or 2632(c)(5). That statement is no longer there. Harry has essentially a mechanism to kind of undo that inadvertent election. The way to undo that would be to go back a manual allocation of GST exemption.

Boulder Issue: Botched Late Allocation and Wrong Valuation Date

Lastly, that final transfer that I’m going to talk about has to do with a botched late allocation of GST exemption that was made by Harry to a trust that he created in 2020. This is now a kind of a bolder sized problem. And the reason that this late allocation was botched was because the special election rule was elected on Harry’s return. So valuing the assets as of the first of a desired or chosen month, the month that was selected was March 1, of 2025, and this trust had a value of $500,000. But in order for this rule to apply and this was for valuation purposes only, Harry would have needed to have filed his return in making this late allocation by the end of March. That was not done. He actually filed his return on April 15, 2025. And so now the value of this trust for purposes of computing the applicable fraction of the trust is not the value as of March 1st but it’s going to be the value of this trust on the date of allocation, the date that the return was actually filed, which was 4/15. So in that case, our value on 4/15 was 600,000. But he had made an allocation of exactly $500,000 of GST exemption to this trust. There was no formula allocation. So now he ends up with an inclusion ratio of 0.167.

This is kind of a bolder size problem. He has to now file another return and make another late allocation of exemption to produce an inclusion ratio of zero. Those are my five problems or issues that I went through during our session in June. And I’m going to turn this now back over to Travis.

Travis Hayes:  Thank you, Steve, for discussing mistakes that can be made by preparers of federal gift tax returns.

 

You may also be interested in:

• Gift Tax Returns: Planning, Ethics, and Best Practices
• Estate & Gift Tax and Charitable Contributions Under the OBBBA

This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel. If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org. © 2018 – 2026 The American College of Trust and Estate Counsel. All rights reserved.