Federal Generation Skipping Tax
The purpose of the generation-skipping tax is to prevent families from avoiding estate tax in younger generations by skipping a generation and transferring property to the next generation. For example, suppose Jack Green dies with a $10,000,000 estate and leaves all of his property in trust with income payable to his children, and upon their death the trust assets go to his grandchildren. Jack’s estate will be subject to the estate tax. However, on the subsequent death of his children, none of the trust property will be taxable in the children’s estate; the family would have “skipped” a generation of estate taxes. The generation-skipping tax is designed to minimize this result by imposing a tax comparable to the estate tax on the “skip.”
There are three types of transfers subject to the generation-skipping tax:
1. Direct skip (e.g., a transfer from grandparent to grandchild)
2. Taxable distribution (e.g., in the above example, if the trust made a distribution of principal to the grandchildren)
3. Taxable termination (e.g., in the above example, upon termination of the trust)
As is the case with the gift tax, an annual exclusion from the GST tax of $12,000 is generally available as well as the exclusion for payment of medical and educational expenses. However, for gifts to trusts, the annual exclusion may not be available.
Each individual has a lifetime exemption from the GST tax. For 2004 through 2009, the exemption is the same as the estate tax exemption ($2,000,000 in 2006).
After 2010, the generation-skipping tax is scheduled to return as in effect for 2001.
- Bates H. Whiteside, CPA
Gulf Coast Professional Planners, LLC
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