17 Generation Skipping Transfer Tax

Question 1

GSTT

Answer 1

1. The GSTT is designed to tax transfers from an individual to a skip person.
   
   1. The GSTT is applied using a flat rate equal to the highest estate and gift tax rate for the year of the transfer (40% for 2019).
2. The GSTT is a tax levied in addition to the gift and estate tax.
   
   1. Lifetime transfers to skip persons may be subject to both gift tax and GSTT.
   2. Testamentary transfers to skip persons may be subject to both estate tax and GSTT.
   3. There is no additional penalty for skipping more than one generation.

Question 2

Skip Person

Answer 2

1. Any of the following:
   
   • A related individual two or more generations below the transferor (i.e., grandchild)
   • A trust, when all (not just some) beneficiaries are two or more generations below the donor
   • An unrelated individual younger than the transferor by 371⁄2 years or more
2. A skip person does not include the following:
   
   • The transferor’s spouse or former spouse, regardless of age
   • A grandchild of the transferor, if the transferor’s child is deceased (predeceased parent rule)
     
     1. The grandchild effectively moves up one generation.
     2. The parent may be the transferor’s child or spouse’s child.
     3. The grandchild may be any grandchild.
     4. An exception extends to collateral heirs if a decedent has no living lineal descendants. In other words, a grandparent who has no grandchildren can make a gift to a grandnephew or grandniece without incurring the GSTT.

Question 3

GSTT Effect of Marriage

Answer 3

A spouse or former spouse of transferor’s lineal descendant is assigned to the same generation as the lineal descendant

Question 4

Types of Transfers subj. to GSTT

Answer 4

• Direct skip
  
  • Transferor (or estate) responsible for GSTT
  • GSTT added to basis
• Taxable distribution
  
  • Trust distribution two or more generations below donor’s
  • Taxable amount is net property received
  • Recipient pays GSTT
• Taxable termination
  
  • Occurs when an interest in a trust terminates because of death or lapse of time or release of a power that results in a skip beneficiary holding interests in the trust.
  • A taxable termination cannot take place as long as at least one nonskip person has an interest in the property.
  • Taxable amount is the value of property transferred, less debts and taxes.
  • Any resulting GSTT is paid by the trust

Question 5

GSTT Reductions

Answer 5

• An annual exclusion is allowed for lifetime direct skip transfers.
• Gift splitting is available if both spouses elect.
• A lifetime GSTT exemption is allowed for every taxpayer ($11,400,000 in 2019).
• Qualified transfers (e.g., payment of medical expenses or tuition directly to provider) are excluded from the GSTT

Question 6

GSTT Reporting

Answer 6

• Lifetime gift: Form 709
• Testamentary gift: Form 706

Question 7

Determining GSTT

Answer 7

1. Multiply taxable amount by the applicable GSTT rate.
   
   1. Taxable amount—the value of any direct skip, taxable distribution, or taxable termination
   2. Applicable GSTT rate—the highest federal estate and gift tax rate (40% for 2019) multiplied by an inclusion ratio
      
      • Inclusion ratio = 1 – (transferor’s annual exclusion and available exemp-tion allocated to the gift ÷ FMV of property transferred)

Question 8

Reverse QTIP Election

Answer 8

1. Under GSTT rules, QTIP property included in the surviving spouse’s gross estate is considered transferred by the surviving spouse, not by the decedent. Therefore, if a decedent transfers property into a QTIP trust, and the trust beneficiaries are grandchildren, the decedent will not be allowed to use his GSTT exemption. The surviving spouse would be required to use her GSTT exemption at death.
2. The reverse QTIP election is a special election available for GSTT purposes. The election treats the QTIP property as if the QTIP election was not made for GSTT purposes.
3. The marital deduction will still be available for estate tax purposes.
4. The reverse QTIP election is often made to use a decedent’s GSTT exemption