In: Advanced Math
The wealthy people gifted money and bequeathed property to their grandchildren without paying any federal estate taxes. The generation-skipping transfer tax was introduced in 1976. This was created to close the loophole whereby inheritances could skip a generation to avoid double estate taxation.
Generation-skipping transfer (GST)
Generation-skipping transfer (GST) refers to the transfer of money or property, as a gift or inheritance, to a person who is two or more generations below that of the grantor. The giving party is referred to as the transferor and the recipient is the skip person.
Many people use a grandchild as a skip person, but a skip person does not have to be a family member. Any individual other than a spouse or ex-spouse is eligible to receive a generation-skipping transfer as long as they are at least 37.5 years younger than the transferor.
Generation-skipping transfer Tax GST
The GST tax is a federal tax imposed on gifts given to skip-persons to make certain that taxes are paid at each generational level and cannot be escaped through the use of a trust.
The tax is only due when a skip person receives amounts in excess of the GST estate tax credit. Fortunately, most people will never encounter the GST tax because of the high threshold.
Once a transferor exceeds the exemption, the GST tax is assessed at a flat rate. The chart below shows GST tax rates since 2001.
Year | GST Tax Rate |
2001 | 55% |
2002 | 50% |
2003 | 49% |
2004 | 48% |
2005 | 47% |
2006 | 46% |
2007 – 2009 | 45% |
2010 | 0% |
2011 | 35% |
2012 | 35% |
2013 or later | 40% |
Source (up to 2011): "Estate Planning For Dummies" by Jordan Simon and Brian Caverly
GSTs can occur before or after the death of the transferor, and the GST tax is assessed when the gift or property transfer is made. While living, the transferor can give the gift directly to the skip person. Upon death, the transferor's will may bequeath property to a skip person or establish a trust from which distributions will be made. Form 709 is used to report both GST taxes and transfers whereby federal gift taxes are due.
Direct vs. Indirect Skips
The taxation of a GST depends on whether the transfer is a direct or an indirect skip. A direct skip is a property transfer that is subject to an estate or gift tax. An example of a direct skip would be a grandmother gifting property to a grandchild. The transferor or their estate is responsible for paying the GST tax for direct skips.
Indirect skips involve transfers that have intermediate steps before reaching a skip person. There are two types of indirect skips: the taxable termination and the taxable distribution.
A taxable termination involves a skip person and a non-skip person. A non-skip person is the primary beneficiary who will receive property before it is transferred to the skip person. The transfer to the skip person takes place upon the death of the non-skip person. Typically, a non-skip person is the child of the transferor. An example of a taxable termination would be a transferor establishing a trust that provides income for his son. Upon the son's death, the remaining property would be passed on to the transferor's grandchild. The GST tax would be paid out of the property when it was passed down to the grandchild.
A taxable distribution is any distribution of income or property from a trust to a skip person that is not otherwise subject to estate or gift tax. If a grandmother established a trust that made payments to her grandson, those payments would be subject to GST taxes. The recipient is responsible for paying any applicable GST tax for a taxable distribution.
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