Generation-skipping transfer tax: Difference between revisions

The U.S. '''Generationgeneration-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 humanspersons who are more than 37 and a half.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> TheThese people are known as "skip persons".<ref>{{Cite web|url=https://www.law.cornell.edu/uscode/text/26/2613|title = 26 U.S. Code § 2613 generation-skipping Skip person and non-skip person defined}}</ref> In most cases where a trust is involved, the GST tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level.

ForAssume, for example, propertya isdonor placedtransfers property in a [[Trust law|trust]] for the donor's child and grandchildren. and Thethat incomeduring the child's lifetime, the trustee may bedistribute distributedincome among the child and grandchildren in accordance with their needs. and 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 generation-skippingGST tax will be imposed when the child dies. This is called a "taxable termination". In that case, the trustee is responsible for filing a GST tax return and paying the tax. On the other hand, a "taxable distribution" occurs if the trustee distributes income or principal to a grandchild before the trust terminates.<ref>{{Cite web|url=https://www.law.cornell.edu/uscode/text/26/2611|title = 26 U.S. Code § 2611 - Generation-skipping transfer defined}}</ref> In that case, the beneficiary is responsible for paying the tax. These taxable events are sometimes overlooked by people who may be unaware of the existence of the tax or its application to their situation. See IRS Forms 706 GS (D-1))<ref>https://www.irs.gov/pub/irs-pdf/i706gsd1.pdf {{Bare URL PDF|date=March 2022}}</ref> and 706 GS(T).<ref>{{Cite web|url=https://www.irs.gov/forms-pubs/about-form-706-gs-t|title = About Form 706-GS (T), Generation Skipping Transfer Tax Return for Terminations &#124; Internal Revenue Service}}</ref>

== The first1976 version of the tax (1976) ==

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.

== TheCurrent version of(1986 the tax starting in 1986onward) ==

The most recent version of the generation-skipping transfer tax, applicable to estate or gift transfers through December 31, 2009, did not attempt to impose a tax equal to the estate or gift tax that was avoided. Instead, the generation-skipping tax was imposed at a flat rate equal to the highest marginal estate and gift bracket applicable at the time of the gift, bequest, transfer or termination. In 2009, that rate was currently 45%. Since 2014, the GST tax rate has remained at a flat 40% of the amount transferred, which is the same as the highest estate and gift tax rate.

In 2009, each taxpayer currently possessedenjoyed a $3,500,000 exemption from the generation-skipping tax. That meant that only aggregate gifts and bequests to grandchildren or younger beneficiaries (or generation-skipping trusts) in excess of $3,500,000 (potentially $7,000,000 for a married couple acting in concert) would be subject to the generation-skipping transferGST tax.

In 2010, like the Federal Estate Tax, the generation-skipping transfer tax was briefly repealed. In somethat waysyear, itthe couldGST betax viewedrate thatwas effectively zero.<ref>{{Cite web|url=https://www.forbes.com/sites/hanisarji/2010/12/23/congress-gift-to-the-wealthy-a-gst-tax-holiday-in-2010-act-before-the-new-year/#48b9b94a2637|title exemption= isCongress' essentiallyGift unlimitedto inthe 2010Wealthy, forA transfersGST thatTax would"Holiday" otherwisein be2010 subject-- toAct Before the tax.New Year!| website=[[Forbes]] }}</ref> However, the law that created theincreased increasesexemptions and the ultimate repeal of the GST Taxtax Exemption, is set to expireexpired on December 31, 2010.<ref>Economic Growth andThe Tax Relief, ReconciliationUnemployment Insurance Reauthorization, and Job Creation Act of 20012010, Pub. L. No. 111-312 § 101 (codified as amended in scattered sections of 26 U.S.C.) (extending the sunset provision in Pub. L. No. 107-16 from Dec. 31, §§2010 to Dec. 31, 2012).</ref> In 2016, the exemption was $5.45 million per person.

Many individualsIndividuals who mightwish otherwiseto leave their entire estates outrightwealth to their childrengrandchildren may allocate their generation-skippingGST exemptions to transfersexemption to generation-skipping transfer tax exempt trusts for their childrenbenefit. and grandchildrenSuch trusts will be funded with cash or property worth up to the available generation-skipping transfer taxGST exemption. IfSuch thetrusts termthat ofcan suchrun trustsfor isan unlimited term (i.e., those not limited, theby trustsstate laws against perpetuities), are often referred to as "[[dynasty truststrust]]s."

UtilizingUsing the generation-skipping tax exemption in this manner offers two important advantages:

[[Category:Inheritance tax]]