What You Need to Know about the Generation-Skipping Transfer Tax

By Wilfert, David J. | Business Credit, October 1993 | Go to article overview

What You Need to Know about the Generation-Skipping Transfer Tax


Wilfert, David J., Business Credit


We receive more inquiries about the generation-skipping transfer (GST) tax than almost any other single topic. If nothing else, by enacting the GST tax, Congress succeeded in getting the attention of both the public and estate planning professionals.

Those who are aware of the GST tax know that it is imposed on transfers of assets to grandchildren and succeeding generations and that there is a $1 million exemption from the tax, but few know much beyond that.

The GST tax is imposed on three types of asset transfers to "skip persons," individuals who are, or are deemed to be, two or more generations below the transferor. The first, a "direct skip," is a gift or bequest to a skip person or a trust that benefits only skip persons. This is the sort of transfer, such as a gift to a grandchild, that one would expect to be subject to the GST tax.

Other GST tax applications are less obvious. A "taxable distribution" is a distribution to a skip person from a trust that also benefits non-skip persons. A "taxable termination" is a similar distribution upon termination of such a trust.

All three categories of transfers are subject to GST tax at a flat rate equal to the highest marginal gift and estate tax rate, currently 55 percent. The manner in which the GST tax is calculated is rather complicated and varies according to the specific type of transfer. The important thing is, the combined gift or estate and GST tax can exceed 100 percent of the value of the subject property.

With a tax so confiscatory in nature, the goal must be to avoid it. The most important objective of GST planning is to maximize each individual's $1 million amount. This is accomplished in two ways. First, the exemption should be allocated to asset transfers that benefit only skip persons and as many of them in as remote a generation as possible. From a tax-saving standpoint, the ideal plan is to allocate the exemption to a discretionary trust for grandchildren and succeeding generations that runs for the longest permissible period.

Of course, many people either do not wish to deny their children access to a substantial portion of their assets or merely want to minimize the effect of the GST tax without letting it dictate their estate plans. In those situations, trusts for children and their offspring should be split into exempt and non-exempt parts, with an instruction to make distributions to non-skip persons from the non-exempt part. This way the exempt assets can be preserved for skip persons, but remain available to the children in case of need. …

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