6. Generation-Skipping Transfer Tax Flashcards
generation-skipping transfer
transfer of property by gift/death to any person who is 2/+ generations below that of transferor (to skip person): A skip person may or may not be related to the transferor. If a gift is made to a non-relative who is 37 ½ years younger than the transferor, the donee is considered a skip person and the transfer is subject to a generation-skipping transfer tax (GSTT).
can be through will or GST: in and of itself the revocable trust may not be a generation-skipping trust, however, the testamentary trusts created within the revocable trust may in fact be GST trusts.
Types of GSTs
-Taxable Distribution: Any distribution of income or corpus from a trust to a skip person that is not otherwise subject to estate or gift tax
-Taxable Termination: A termination by death, a lapse of time, the release of power, or otherwise of an interest in property held in a trust resulting in skip persons holding all the interests in the trust
- Direct Skip: A transfer subject to an estate or gift tax made to a skip person
Circumstances when GST techniques may be useful
- client has wealthy children: Create a trust where the children are the lifetime income beneficiaries of the trust, and the remaindermen are the grandchildren. This would give the children the use and enjoyment of the inherited property, together with protection against creditors, divorce, courts, or bankruptcy. Although the client may pay gift or estate tax, the children would not pay estate tax or GST tax on the exempt inherited property at death. No estate tax or GST tax is paid by the children, or future issue (depending on the term allowed for the trust) unless the allocation of the GST exemption was not properly made.
-client wants to minimize transfer taxes in a child’s estate but still wants to give the child the use and benefit of the estate, or a client wants to protect property from a spendthrift child or from being subject to loss through a child’s divorce or bankruptcy: Create a GST trust to provide income to children for life, but preserve principal for subsequent distribution to grandchildren
-client wises to make direct transfer to grandchild/another skip person for immediate benefit: make gift directly to grandchild/skip person
How GSTs are made
If asset value > GST exemption, then client may want to divide assets within trust into exempt and non-exempt portions.
Dynasty trusts allow property to be passed through multiple generations without being depleted by GSTT
Exempt trust would receive assets to which transferor’s GSTT exemption has/will be allocated, usually with assets with high-appreciation potential since appreciation is exempt from GSTT
Inclusion ratio
-0: then 100% immunity from GST
-50/50 then one half is immune and the other half is subject to GST Tax
-1: all taxable distributions and taxable terminations will be fully subject to the GST tax
Amount of GSTT exemption allocated/[value of transferred property-(fed est or death taxes + charitable deductions)+
Who may be considered a skip person?
grandchildren, great-grandchildren, grand-nieces, and grand-nephews. The skip person may or may not be related to the transferor. If a gift is made to a non-relative (not a wife) who is 37 ½ years younger than the transferor
trust may be a skip person if all beneficiaries holding interests in the trust are skip persons, or no person holds an interest in the trust, but no distributions could be made to nonskip persons. If a trust is a skip person, its beneficiaries are not assigned to a generation.
taxable amount
amount to be multiplied by the applicable rate, depends on whether the transfer is considered a taxable distribution, a taxable termination, or a direct skip.
generation assignment
-Transferor’s Generation: Siblings, spouse, siblings’ spouses, cousins:
Unrelated- Not more than 12 ½ years younger
-Intermediate Generation: Children, nieces, nephews, and their respective spouses: Unrelated- Between 12 ½ and 37 ½ years younger
-Skip Persons Generation: Grandchildren, great-grandchildren, and their respective spouses: Unrelated- More than 37 ½ years younger
predeceased child exception
taxable distribution
net value of the property received by the skip person less any consideration paid (expenses incurred w collection/refund of GST tax and any consideration paid for the distribution)
transferee obligated to pay GST tax in taxable distribution and can deduct on personal income tax return. If trust pays tax, then payment treated as additional taxable distribution to GST tax
Taxable Termination
termination by death/lapse of time/release of a power, or otherwise of an interest in property held in a trust resulting in skip persons holding all the interests in the trust.
Occurs on date of parents’ death
Can’t occur if at least one nonskip person has a present interest in the property
taxable amount in the case of a taxable termination
value of all property involved minus deduction for expenses/debts/taxes other than GST generated by property and consideration paid by transferee
trustee responsible for payment
Direct Skip
transfer subject to an estate or gift tax made to a skip person
taxable amount of direct skip
taxable amount in the case of a direct skip is the value of the property or interest in property, including the current right to receive income or corpus or power of appointment, received by the transferee, reduced by any consideration paid by the transferee
transferor (the decedent in the case of a death time transfer or the donor in the case of a lifetime transfer) is responsible for payment of the GST tax in the case of a direct skip
tax-exclusive, paid by the transferor or the estate and the taxable amount does not include the amount of generation-skipping tax.
Transfers excluded from GST
-Transfers made by gift that qualify as gift-tax free such as direct payments made for the donee’s tuition or medical expenses.
-Transfers that have already been subjected to the GSTT in which the transferee was in the same or lower generation as the present transferee.
Transfers in the trust will not qualify for the annual exclusion unless:
-only 1 skip person is beneficiary
-no portion of trust’s income/principal can be distributed
-trust assets will be included in grandchild’s estate
Choose the transactions that are excluded from GST tax.
Gifts already subject to GST tax and the new transferee is the previous transferee’s son.
Tuition paid to a university for a skip person’s education.
Applicable fraction
portion of GST tax exclusion / [val of property transferred-(fed est or state death tax recovered + charitable deduction allowed)]
GST tax
Inclusion ratio x max fed estate tax rate x taxable amount
Liability for Payment of GST Tax
- taxable distribution: amount received by transferee-expenses, paid by trustee
-taxable termination: value of property in which interest terminates-expenses attributable to property, paid by trustee
-direct skip: value of property received, paid by transferor
Provisions for GST
-QTIP: Reverse Q-TIPS can be made by the executor to apply the decedent’s GST exemption to the Q-TIP GST trust.
-Taxation of multiple skips: Multiple-trust skips are taxed more than once. But if a direct skip is direct to a great-grandchild, two taxes are not imposed.
-Basis adjustments: In general, the basis is increased by an amount equal to the portion of the GSTT actually imposed which is attributable to the appreciation of the property transferred.
-Disclaimers: A disclaimer that results in property passing to a person at least two generations below that of the original transferor will result in a GSTT. For example, assume a daughter disclaimed a bequest from her mother. As a result of that disclaimer, certain property passes to the mother’s granddaughter. The GSTT would be imposed on the transfer - in addition to the federal estate tax.
-Return requirements: The GSTT return must be filed by the person liable for the payment of the generation-skipping tax. In the case of a direct skip other than a direct skip from a trust, the return must be filed on or before the due date of the applicable gift or estate tax return. In other cases, the GSTT return must be filed on or before the fifteenth day of the fourth month after the close of the taxable year in which the transfer occurs.
-IRC Section 303 can be used to make protected redemptions of stock to pay a GSTT.
-IRC Section 6166, which allows for installment payments of federal estate tax, allows deferral of the tax generated under a GST because of direct skips resulting at death.
Recipients of income subject to the GST tax from trust distributions may take an
income tax deduction (similar to the IRD deduction under IRC Section 691) for the GST tax imposed on the distribution.
Allocation of the GST Exemption
At the transferor’s death, where the executor or other person making the allocation fails to allocate the exemption, it is allocated automatically according to a statutory formula.
any unused exemption allocated first to direct skips occurring at the individual’s death on a pro-rata basis and then to any trusts from which a taxable distribution or termination could occur after the transferor’s death. Thus, the statutory order of allocation tends not to make optimal use of the allocation.
The GST exemption is not portable and cannot be transferred to the surviving spouse therefore spouses should incorporate GST planning into their estate plans.
Provisions for Indirect Skip
-> 25% of the trust must be distributed to, or withdrawn by, nonskip persons prior to reaching age 46 (or a date or event prior to such birthday)
-> 25% of the trust must be distributed to, or withdrawn by, nonskip persons if they are living on the date of death of an individual named in the trust who is more than 10 years older than such skip persons
-If a nonskip person dies before a date or event described in (1) or (2), more than 25% of the trust must be distributed to such person’s estate or subject to a general power of appointment by such individual
-The trust would be includable in the gross estate of a nonskip person (other than the transferor) if the person died immediately after the transfer, or
-The trust is a CLAT, CLUT, CRAT, or CRUT with a nonskip remainder person.
Effective Date of Allocation
Date of transfer
