Question

Estate Finance Family Tax Planning Question

In 2019, Grandfather makes the following transfers:

• $100,000 to Grandson

• $100,000 to Son

• $100,000 to a trust that provides distributions of income to Son for Son’s life and upon Son’s death is distributed to Son’s children.

• $100,000 to a trust that provides distributions of income to Son for Son’s life and upon Son’s death is distributed to Son’s children. Son has the right to withdraw trust assets when he turns 40. Son is 30 in 2019 and has two children.  

Assume Grandfather has $1 million of GST exemption in 2019 and does not affirmatively allocate GST exemption on his 2019 Form 709. How much GST exemption is automatically allocated to each of Grandfather’s transfers in 2019 and why?

Answer 1

Under Generation Skipping Transfer Tax, there are two types of skips:

1. Direct Skip
2. Indirect Skip

Direct Skip refers to transferring a property by skipping a generation that is subject to estate or gift tax.

An indirect skip includes:

• A taxable termination which involves both the skip and the non skip person and
• A taxable distribution which involves distribution from a trust to a skip person.

First let us classify the 3 transfers as direct or indirect skips:

1. $100,000 to Grandson - Direct skip
2. $100,000 to Son - does not attract GST since it does on involve a skip person.
3. $100,000 to a trust that provides distributions of income to Son for Son’s life and upon Son’s death is distributed to Son’s children. Son has the right to withdraw trust assets when he turns 40. Son is 30 in 2019 and has two children - A taxable termination under indirect skip

Assuming the grandfather had $1million GST exemption and does not affirmatively allocate GST exemption in the form:

GST exemption is automatically allocated to direct skips and contributions to trusts. Hence for transfers 1 & 3, automatic allocation will apply to the tune of $200,000 (100000+100000). Therefore $200,000 will be reduced from the GST exemption of the grandfather.