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Javert2113 (talk | contribs) Adding short description: "United States tax system for transfers to younger persons" |
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{{Short description|United States tax system for transfers to younger persons}}
{{UStaxation}}
The U.S. '''generation-skipping transfer tax''' ({{a.k.a.}} "GST tax") imposes a tax on both outright gifts and transfers in [[Trust law|trust]] to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren.<ref>See IRS Form 709 Instructions</ref> These people are known as "skip persons
Assume, for example, a donor transfers property in a [[Trust law|trust]] for the donor's child and grandchildren and that during the child's lifetime, the trustee may distribute income among the child and grandchildren in accordance with their needs. Assume further that the trust instrument provides that the remaining principal of the trust will be distributed outright to the grandchildren following the child's death. If the trust property is not subject to [[Estate tax in the United States|estate tax]] at the child's death (by reason of a general power of appointment, e.g.), a GST tax will be imposed when the child dies. This is called a "taxable termination
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The first version of the generation-skipping transfer tax was introduced in 1976.<ref>The Tax Reform Act of 1976, Pub. L. No. 94-455, § 2006, 90 Stat. 1520, 1879−90.</ref> That version attempted to impose a generation-skipping tax exactly equal to the estate or gift tax that was avoided. In the above example, the Executor of the child's Will would have had to determine the estate tax, if any, the child's estate owed without regard to the existence of the trust. Then the Trustee of trust would have to use the child's Federal Estate Tax Return as the basis for recomputing the child's estate tax liability as if the trust property had been part of the child's estate.
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That approach posed so many administrative problems that in 1986 [[United States Congress|Congress]] repealed the 1976 version and enacted a new generation-skipping transfer tax law.<ref>Tax Rm Act of 1986, Pub. L. No. 99-514, §§ 1431−33, 100 Stat. 2085,
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The child may serve as trustee of the trust and hence control trust investment policy. If so, it would be necessary to limit the child's discretionary powers over distributions of income and principal by an "ascertainable standard" in order to avoid subjecting the trust to federal estate taxation at the child's death. Appointing the child as sole trustee may subject the trust to claims of the child's creditors.
==See also==
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