What is the Generation-Skipping Transfer Tax?
Complicated tax laws apply to transfers that skip a generation or more. The generation-skipping transfer tax is applicable to transfers, whether direct or made in trust, to a transferee who is at least two generations below the generation of the transferor. Gifts you make during your lifetime or bequests you leave to heirs of your estate may be subject to the GST tax. For example, the GST tax may apply when a grandparent gifts property to a grandchild or great grandchild if it exceeds the exemption amount.
Any GST taxes owed may be in addition to federal estate or gift taxes. Even if these taxes apply to your gifts or your estate, they may be eliminated by the unified credit.
The generation-skipping tax can also apply to transfers other than those between a grandparent and grandchildren or great-grandchildren. It also applies to transfers to any beneficiary or transferee that is two or more generations below the first generation, meaning the transferor or decedent.
What is the Rate of the Federal GST Tax for 2010, 2011, and 2012?
The following is an overview of the GSTT 2011 and GSTT 2012. The federal generation skipping transfer tax was reinstated for 2010 with a rate of 0 percent. Beginning January 1, 2011 and continuing through December 31, 2012, the exemption amount per person for generation skipping transfers is $5,000,000. The top generation skipping transfer tax rate in 2011 and 2012 is 35 percent.
Remember that when considering estate, gift, and GST taxes, you also need to consider any such taxes that may apply at the state level. If you are interested in transferring assets to a beneficiary that skips one or more generations, consult an estate planning attorney or CPA for guidance on the best estate planning strategy.
What is a Generation Skipping Trust?
A generation skipping trust allows a grandparent to transfer property to his grandchildren or great grandchildren without paying an extra layer of estate tax. A GSTT trust can be thought of as a trust by a grandparent for a grandchild that bypasses the grandparent’s own child. There can be three or more generations involved in a generation skipping trust. The grandparent is the first generation. The grandparent’s child is the middle or second generation. The grandchild is the third or final generation. The beneficiary receiving the generation-skipping transfer is referred to as the skip person.
In a generation skipping trust, the person in the first generation, such as the grandparent, places property in the trust. The income from the GSTT trust is paid to the beneficiaries in the second generation, such as the grandparent’s children. When the grandparent dies, estate tax is applied on the amount of property in the trust. When the second generation beneficiary dies, the property in the trust is transferred to the third generation beneficiaries. The principal amount in the trust is not subject to estate tax when it is transferred to the grandchildren or third generation beneficiaries.
If you are concerned about estate taxes, gift taxes or generation skipping taxes, consult an estate planning lawyer or a tax advisor to determine if a GSTT trust should be part of your estate plan. Because of the complex nature of these trusts and the current state of flux of U.S. estate tax laws, do not attempt to create and fund such a complicated estate planning device without guidance from a licensed professional.
What is the Purpose of the GST Tax?
When parents die they usually pass their estate to their children. As a result, the federal estate tax is usually applied on transfers to each generation, allowing the federal government to capture that tax revenue. The generation skipping transfer tax, also known as the GST tax, was enacted in 1976 to prevent wealthy families from avoiding federal estate taxes for one or more generations by transferring property directly to their grandchildren or great grandchildren instead of their children.