Ch 13 Estates Generation-Skipping Transfers Flashcards
Qualified transfers are not subject to GSTT.
a. True b. False
True
The inclusion ratio is determined by subtracting the applicable fraction from one.
a. True b. False
True
The inclusion ratio is determined by subtracting the applicable fraction from one.
a. True b. False
True
The grantor of a dynasty trust often gives the trustee the authority to terminate the trust.
a. True b. False
True
Dynasty trusts should always include spendthrift clauses.
a. True b. False
True
To which of the following transfers does the GSTT not apply?
a. A taxable termination.
b. A taxable distribution.
c. A direct skip.
d. A skip-over.
The correct answer is d.
A skip-over does not exist. GSTT applies to the three other listed options.
for 2022
Melanie has never made any gifts subject to GSTT. She is single and would like to transfer as much as she possibly can during the year to her grandchild without triggering any GSTT. How much can Melanie transfer to her grandchild this year and meet her goal?
a. $16,000.
b. $4,769,800.
c. $12,060,000.
d. $12,076,000.
The correct answer is d.
Melanie can transfer an amount up to the GSTT exemption, $12,060,000 and the annual exclusion for the year, $16,000.
Utilizing both exclusions, Melanie can transfer $12,076,000 for 2022 without being subject to the GSTT
Many wealthy grandparents wish to name their grandchildren as the beneficiaries of their life insurance policies with substantial death benefits. How should the life insurance policies for the benefit of grandchildren be held if the grandparents are likely to be subject to the estate tax?
a. A revocable life insurance trust should be established and funded with a transfer of the life insurance policy.
b. The grandparent should be the owner with the grandchild as the listed beneficiary.
c. An irrevocable life insurance trust should be created for the benefit of the grandchild.
d. The ownership of the policy should be transferred to the grandchild.
The correct answer is c.
The policy should be transferred to an ILIT with the grandchild listed as the beneficiary. Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent’s life.
Option a is incorrect because a revocable trust would
still cause inclusion in the grandparent’s gross estate and possible GSTT consequences.
Option b is incorrect because if the grandparent owns the policy, the death benefit will be included in the grandparent’s gross estate and still subject to GSTT.
Option d is incorrect because the grandchild should not own the life insurance policy outright since it would not place any limitations on the grandchild’s ability to spend the funds
Klein transfers $2,000,000 in 2022 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Klein’s child, Calvin, and the trust principal is to be paid to Klein’s grandchild, Harris. Klein allocates $800,000 of his GSTT exemption to the trust on a timely filed gift tax return.
What is the GSTT rate applicable to the trust?
a. 20%.
b. 24%.
c. 40%.
d. 60%.
The correct answer is b.
The applicable fraction of the trust is 0.40 ($800,000 / $2,000,000) and the inclusion ratio is 1 - 40% = 60%.
If the maximum federal transfer tax rate is 40% (in 2022), the GSTT rate applicable to the trust is 24% (0.40 x 0.60).
Upon what form is a lifetime GST reported?
a. Form 1040.
b. Form 709.
c. Form 706.
d. Form 1041.
The correct answer is b.
Any lifetime GST is reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax
Return
In 2024, Patricia, a single wealthy woman, has made previous generation-skipping gifts equal to her current lifetime exemption and now plans to give her granddaughter $1,000,000 this year. Patricia has made no gifts at all to anyone this year.
What will be Patricia’s total cash out flow as a result of this transaction?
$1,000,000.
$1,392,800.
$1,785,600.
$1,942,720
$1,942,720
Rationale
GST Tax
Gift Amount $1,000,000
Annual Exclusion (AE) $18,000
Taxable GST $982,000
GST Tax Rate 40%
GST Tax $392,800
Gift Tax Calculation
Gift (includes GST tax) $1,392,800
Annual Exclusion (AE) $18,000
Taxable Gifts $1,374,800
Gift Tax Rate 40%
Gift Tax $549,920
Summary
Gift $1,000,000
GST Tax $392,800
Gift Tax $549,920
Total Cash Outflow $1,942,720
Byron, age 65, gave $30,000 each to his son, his daughter, his six-year-old grandniece, his 21-year-old female neighbor, and his wife. Which of the transfers would be subject to GSTT?
The transfer to his wife.
The transfer to his neighbor.
The transfer to his grandniece and the neighbor.
The transfer to his grandniece, his neighbor, and his daughter.
The transfer to his grandniece and the neighbor.
Rationale
Only the transfer to his neighbor and his grandniece would be subject to GSTT. If the transferee is a non-lineal descendant who is more than 37.5 years younger than the transferor, the transfer is subject to GSTT.
All of the other transfers are transfers to relatives within one generation. A grandniece is a lineal descendant and a skip person
Upon what form is a testamentary transfer subject to GSTT reported?
Form 1040.
Form 706.
Form 1041.
Form 709.
Form 706.
Rationale
Testamentary transfers subject to GSTT are reported on the Form 706, the United States Estate and Generation-Skipping Transfer Tax Return.
Which of the following statements concerning the GSTT is not correct?
Each individual can exclude up to $13,610,000 of transfers from GSTT.
The GSTT is applied to a gift after the application of the annual exclusion.
Gifts that are subject to GSTT can be split.
The GSTT only applies to transfers in trust.
The GSTT only applies to transfers in trust.
Rationale
The GSTT applies to the transfer of any property to a skip person or an interest in trust for the benefit of a skip person. All of the other statements are true
Grayson, age 78, retired from his 40-year career at BBB Corporation last year. As part of an overall estate plan, Grayson has begun establishing many different trusts.
Of the following list of beneficiaries listed in Grayson’s trusts, who would be a skip person for purposes of the GSTT?
Lucy, age 31, Grayson’s wife.
Tiffany, age 22, Grayson’s girlfriend.
Parker, age 25, Grayson’s grandson, whose mother is living, but whose father, (Grayson’s son) is deceased.
Bill, Grayson’s 81-year-old lifelong neighbor.
Tiffany, age 22, Grayson’s girlfriend.
Rationale
Because Tiffany is unrelated and is more than 37.5 years younger than Grayson, she is a skip person. Lucy is not a skip person because a spouse is always deemed to be in the transferor’s generation. Parker is not a skip person because of the predeceased ancestor rule. Bill is not a skip person because he is older than Grayson.
Klein transfers $2,000,000 in 2024 to an irrevocable trust providing that income is to be accumulated for 22 years. At the end of 22 years, the accumulated income is to be distributed to Klein’s child, Calvin, and the trust principal is to be paid to Klein’s grandchild, Harris.
Klein allocates $600,000 of his GSTT exemption to the trust on a timely filed gift tax return. What is the GSTT rate applicable to the trust?
20%.
28%.
30%.
70%.
28%.
Rationale
The applicable fraction of the trust is 0.30 ($600,000 / $2,000,000) and the inclusion ratio is 1 - 30% = 70%. If the maximum federal transfer tax rate is 40% (in 2024), the GSTT rate applicable to the trust is 28% (0.40 x 0.70).
Billy funds a trust with property valued at $7,000,000. The income beneficiary is Robin who has a general power of appointment over the trust. The remainder beneficiary is Seth, Robin’s son and Billy’s grandson. Billy dies and then Robin dies.
After Robin’s death, the assets are distributed to Seth. Who pays any GST tax?
There is no GST tax.
Seth after the distribution.
The trust before the distribution to Seth.
Robin’s estate.
There is no GST tax.
Rationale
There is no GST tax. Robin’s general power will make the entire trust included in her gross estate and Seth is not a skip person relative to Robin.
Which of the following transfers or bequests will not be subject to generation-skipping transfer tax?
- The grantor placed $16 million in trust for his son’s three children, but his son is no longer living at the time the trust was created and the grandchildren live with their mother.
- The decedent left $16 million in his will to his grandson, and the decedent had two living children, neither of whom was the parent of the grandson.
- The grantor’s only son had already died when he transferred $16 million to two separate trusts for his two grandnieces, whose parents were dead, and another $2 million to a trust for his grandson.
- The decedent had no children and left $16 million to his nephew, even though the decedent’s brother was still alive but had stopped communicating with the decedent.
1 and 4.
2 and 3.
1, 2, and 4.
2, 3, and 4.
1, 2, and 4.
Rationale
The predeceased parent exception applies to transfers to a grandchild where the parent who is a lineal descendant of the transferor has died prior to the transfer.
The transfer in statement 1 is not subject to the GST tax because the grandchildren’s father is the lineal descendant of the grantor and is deceased.
The grandson who received the $16 million in statement 2 also has no living parent descended from the decedent, so the GST tax will not apply.
The transfer to the two grandnieces will be subject to GST tax because the grantor has a lineal descendant who is alive.
Transfers to collateral heirs, such as the grandnieces, qualify for the predeceased parent exception, except when a lineal descendant is alive.
Since the grandson is a lineal descendant, the GST tax will be applied. In statement 4, the bequest to the nephew is not a generation-skipping transfer because the nephew is just one generation below the transferor
Which of the following exemptions or credits is provided in the generation-skipping transfer tax rules for a generation-skipping transfer that occurs during 2024?
A $13.61 million exemption for each transfer from the grantor to their grandchildren in a direct skip.
A $13.61 million exemption per child of the grantor.
A $13.61 million exemption per transferor for all generation-skipping transfers.
A $13.61 million unified credit for lifetime or testamentary generation skipping transfers
A $13.61 million exemption per transferor for all generation-skipping transfers.
Rationale
The current provision for 2024 is a $13.61 million exemption per grantor for all of their generation-skipping transfers.
Ross is age 74 and made transfers to the following people. Which of the following individuals would be considered a skip person?
- Rachel; Ross’s wife who is 23 years old
- Joey; Ross’s grandnephew who is 13 years old
- Matthew; Ross’s youngest son who is 5 years old
- Monica; Ross’s sister’s grandchild
All of the above.
Joey and Monica.
Matthew and Monica.
Monica only.
Joey and Monica.
Rationale
Lineal descendants must be two or more steps down. The 37½ year rule applies to non-lineal persons. A spouse of the transferor is never a skip person. A grandnephew of the transferor is a lineal descendant and a skip person.
Many wealthy grandparents wish to name their grandchildren as the beneficiaries of their life insurance policies with substantial death benefits.
How should the life insurance policies for the benefit of grandchildren be held if the grandparents are likely to be subject to the estate tax?
A revocable life insurance trust should be established and funded with a transfer of the life insurance policy.
The grandparent should be the owner with the grandchild as the listed beneficiary.
An irrevocable life insurance trust should be created for the benefit of the grandchild.
The ownership of the policy should be transferred to the grandchild.
An irrevocable life insurance trust should be created for the benefit of the grandchild.
Rationale
The policy should be transferred to an ILIT with the grandchild listed as the beneficiary.
Ideally, the ILIT would be funded with cash contributions less than the annual exclusion and would pay the premiums of the life insurance policy on the grandparent’s life.
Option a is incorrect because a revocable trust would still cause inclusion in the grandparent’s gross estate and possible GSTT consequences.
Option b is incorrect because if the grandparent owns the policy, the death benefit will be included in the grandparent’s gross estate and still subject to GSTT.
Option d is incorrect because the grandchild should not own the life insurance policy outright since it would not place any limitations on the grandchild’s ability to spend the funds.
Greer, a 46-year-old divorced mother of three, has owned her own automotive repair center for 15 years. She would like to provide income to her assistant, Marilyn, and her other friends. Greer established a trust naming Marilyn, age 67, as the initial income beneficiary for her life. At Marilyn’s death, Doug, a 59-year-old mechanic who has worked for Greer, will receive the income for the remainder of his lifetime.
At Doug’s death, the remainder interest will be divided equally between Greer’s sons, Larry, Curley, and Moe. When will this trust be subjected to GSTT?
At the date of creation of the trust.
At Marilyn’s death.
At Doug’s death.
Never.
Never.
Rationale
The trust will not be subjected to the GSTT because the non-family beneficiaries are older than the trust settlor, and the remainder beneficiaries are the first generation below the settlor.
Thus, no beneficiary is a skip person.
Melanie has never made any gifts subject to GSTT. She is single and would like to transfer as much as she possibly can during the year to her grandchild without triggering any GSTT.
How much can Melanie transfer to her grandchild this year and meet her goal?
$18,000.
$5,389,800.
$13,610,000.
$13,628,000.
$13,628,000.
Rationale
Melanie can transfer an amount up to the GSTT exemption, $13,610,000 and the annual exclusion for the year, $18,000. Utilizing both exclusions, Melanie can transfer $13,628,000 for 2024 without being subject to the GSTT.
All the following statements concerning the generation-skipping transfer tax are correct except:
The tax applies to a lifetime gift or testamentary transfer from a grandparent directly to a grandchild.
A taxpayer avoids the tax by transferring property into a trust for the life of the taxpayer’s child, with the remainder to the grandchildren.
Outright gifts qualifying for the gift tax annual exclusion are not subject to the tax (up to the annual exclusion amount).
Payments of educational or medical expenses for a grandchild are not subject to the tax.
A taxpayer avoids the tax by transferring property into a trust for the life of the taxpayer’s child, with the remainder to the grandchildren.
Rationale
The generation-skipping transfer tax applies to direct skips, which are gifts from grandparents to grandchildren.
The GST tax also applies to trust distributions or remainder interests that pass to skip beneficiaries.
A testamentary gift by a grandparent to a grandchild in 2024 that is subject to the generation-skipping transfer tax is taxed at what rate?
0%.
15%.
40%.
The rate is progressive (it increases with the size of the total transfers).
40%.
Rationale
The GST tax rate is equal to the highest gift and estate tax rate (40% in 2024).
To which of the following transfers does the GSTT not apply?
A taxable termination.
A taxable distribution.
A direct skip.
A skip-over.
A skip-over.
Rationale
A skip-over does not exist. GSTT applies to the three other listed options.
Lana transfers $18,000 to her son, Rey; $40,000 to her niece, Joy; and pays Hollowpoint Medical Hospital $50,000 for her granddaughter, Jackie’s, medical expenses.
Which of these transfers is subject to GSTT?
None of the listed transfers will be subject to GSTT.
The transfer to Jackie.
The transfers to Joy and Jackie.
The transfers to Joy, Rey, and Jackie.
None of the listed transfers will be subject to GSTT.
Rationale
None of the transfers will be subject to GSTT. The transfers to Rey and Joy are not subject to GSTT because Rey and Joy are non-skip persons. The payment to Hollowpoint Medical Hospital is not subject to GSTT because it is a qualified transfer paid directly to the medical institution.
Which of the following statements regarding dynasty trusts is not true?
A dynasty trust will not vest its ownership in each generation of beneficiaries.
Alaska has laws that favor the creation of dynasty trusts.
The income of a dynasty trust is always taxed at the trust level since ownership does not vest in the beneficiaries.
A dynasty trust can give a beneficiary a limited power of appointment without causing inclusion of the trust’s assets in the beneficiary’s gross estate.
The income of a dynasty trust is always taxed at the trust level since ownership does not vest in the beneficiaries.
Rationale
The income of a dynasty trust is taxed at the trust level to the extent the income is not distributed to the beneficiary.
The income that is distributed to the beneficiary is taxed to the beneficiary.
A dynasty trust can also be established as an intentionally defective grantor trust. All of the other statements are true.
All the following statements concerning generation-skipping transfers are correct except:
The generation-skipping transfer tax will be triggered if a trustee makes a distribution of income or corpus to a skip beneficiary.
A taxable distribution is a distribution to a skip beneficiary that is not otherwise subject to estate or gift taxes.
A skip beneficiary is a person who is one or more generations younger than the transferor’s generation.
A taxable termination, subject to the GST tax, can occur when a trust for a grantor’s child ends at the child’s death, and the assets pass to the grandchildren
A skip beneficiary is a person who is one or more generations younger than the transferor’s generation.
Rationale
Option c is not a correct statement. A skip beneficiary is two or more generations younger than the transferor’s generation, not merely one or more generations younger.
Options a, b, and d are correct statements.
All of the following statements concerning the GST tax are correct except?
The GST tax is flat at 40%.
Like the gift tax, the GST tax lifetime exemption must be used first to determine any GST tax liability.
Any GST tax paid on a direct skip is treated as a gift for gift tax purposes.
Like gift tax, the lifetime exemption for GST tax is $13,610,000.
Like the gift tax, the GST tax lifetime exemption must be used first to determine any GST tax liability.
Rationale
Unlike gift tax, the lifetime exemption can be allocated to any gift or several gifts. The automatic allocation provisions for the GSTT exemption would result in an allocation of GSTT exemption to any generation-skipping transfer unless the donor affirmatively elects not to allocate the exemption on a gift tax return. Without the affirmative election, the GST lifetime exemption will be used first when determining GST tax liability.
Dutch created and funded an irrevocable trust for his daughter, Remy, with $1,000,000. Remy was the income beneficiary and her two daughters (Dutch’s lineal grandchildren) were the remainder beneficiaries. Which of the following statements is correct?
This is a skip trust only if Dutch predeceases Remy.
When Remy dies, there is a taxable termination of the trust for GSTT purposes.
At the inception, this is a skip trust and is subject to GST tax or use of the GSTT exemption when the trust is funded.
Dutch does not need to allocate part of his lifetime GSTT exemption to this transfer, since no GST tax will be due on the transfer
When Remy dies, there is a taxable termination of the trust for GSTT purposes.
Rationale
Upon Remy’s death, the only people left are skip people. This is a taxable termination.
Which of the following statements concerning the generation-skipping transfer tax (GSTT) is (are) correct?
- A direct-skip transfer is subject to estate or gift tax in addition to the GSTT.
- A taxable distribution is usually not subject to gift or estate taxes, even though it is subject to the GSTT.
- A taxable termination occurs only when a trust is terminated, resulting in a distribution to a skip person.
1 only.
2 only.
1 and 2.
2 and 3.
1 and 2.
Rationale
A direct skip is a transfer to a skip person where the transfer is subject to estate or gift tax.
A taxable distribution from a trust is not generally subject to estate or gift taxes.
A taxable termination occurs when there are no longer any non-skip beneficiaries. It does not require that the trust be terminated, only that all non-skip interests have been terminated.
All the following statements concerning the application of the generation-skipping transfer tax to testamentary direct-skip transfers are correct except:
No annual exclusion or gift-splitting applies to testamentary direct-skip transfers.
A $13.61million exemption (in 2024) will be available to each decedent to the extent that the exemption has not been used for lifetime generation-skipping transfers.
The executor is responsible for filing the federal estate tax return, Form 706, to report the generation-skipping transfer tax.
The federal estate tax is not imposed where the generation-skipping transfer tax is applicable.
Confidence of your answer
The federal estate tax is not imposed where the generation-skipping transfer tax is applicable.
Rationale
The generation-skipping transfer tax is imposed in addition to the federal estate tax.
Which of the following statements concerning the generation-skipping transfer tax are correct?
- For a lifetime direct skip, the GST tax is calculated and reported on the federal gift tax return, Form 709.
- For a testamentary direct skip, the GST tax is calculated and reported on the federal estate tax return, Form 706.
- The rules for splitting gifts between spouses apply to the GST tax on lifetime direct-skip gifts.
- The annual exclusion applies to the calculation of the GST tax on a lifetime direct skip.
1 and 2.
2 and 3.
3 and 4.
1, 2, 3, and 4.
1, 2, 3, and 4.
Rationale
A lifetime gift that is a direct skip is reported on the federal gift tax return, Form 709, and the GST tax is calculated on this form. For a direct skip that is a testamentary gift, the GST tax is calculated and reported on the federal estate tax return, Form 706. The rules for splitting gifts between spouses and for the annual exclusion apply to the GST tax if it is a lifetime direct-skip gift.
Beth, age 90, made $30,000 gifts to the following individuals:
Her son, John, age 45
Her daughter’s son, Wayne, age 55
Her best friend’s son, Andrew, age 45
Her new boyfriend, Bill, age 40
Which of these individuals is not a “skip” individual for purposes of Generation Skipping Transfer Tax?
A.John B.Wayne C.Andrew D.Bill
Solution: The correct answer is A.
John is Beth’s child and is not a skip individual. The fact that John is more than 37.5 years younger than Beth is irrelevant because the age is only important for non-lineal descendants
Lane established a trust with $500,000. The terms of the trust say that Lane’s son Anthony will receive the income for his life and Lane’s grandson Brady will receive a $50,000 principal distribution at age 25 and the remainder of the trust when Anthony dies.
What type of Generation Skipping Transfer occurs when the distribution is made to Brady at age 25?
A.Direct Skip B.Taxable Termination C.Taxable Distribution D.This is not a generation skipping transfer
Solution: The correct answer is C.
The payment of the remainder is a taxable termination.
The distribution at age 25 is a taxable distribution.
Which statement is incorrect concerning the GST tax?
A.GSTT system has an annual exclusion. B.GSTT is a progressive tax similar to the estate tax. C.GSTT has a lifetime exemption D.GSTT has an exemption for qualified transfers.
Solution: The correct answer is B
The GSTT rate is a flat tax rate equal to the maximum estate tax rate.
Choice A is a true statement. GSTT does not apply to annual exclusion gifts.
Choice C is a true statement. GSTT does not apply to gifts that qualify for the lifetime exemption.
Choice D is a true statement. GSTT does not apply to qualified transfers.
Which of the following statements is true regarding allocation of the GSTT exemption for direct skips during life?
A.The transferor's GSTT exemption is automatically allocated to all lifetime direct skips. The transferor must opt out if they do not want their exemption allocated. B.The transferor must affirmatively elect to allocate their GSTT exemption to lifetime direct skips. If they do nothing, no exemption will be allocated. C.The transferor's GSTT exemption is automatically allocated to the first $1 million in lifetime direct skips only. For larger transfers, they must affirmatively allocate additional exemption. D.The transferor's GSTT exemption cannot be allocated to lifetime direct skips. It can only be allocated at death on the estate tax return.
Solution: The correct answer is A
The transferor’s unused GSTT exemption is automatically allocated to lifetime direct skips. To avoid allocation, the transferor must opt out.
Choice B is incorrect. The GSTT exemption is automatically applied without an affirmative election.
Choice C is incorrect. The full amount of direct skips is automatically covered by the GSTT exemption, not just the first $1 million.
Choice D is incorrect. The transferor can allocate their GSTT exemption to lifetime direct skips. It does not have to wait until death.
Which of the following statements concerning taxation issues for direct skips is incorrect?
A.The trustee is responsible for paying (from the trust) the GSTT on a taxable termination. B.The transferee is liable for paying the GSTT on a taxable distribution . C.If both gift tax and GST taxes are due, the transferee must include the GSTT paid as an additional taxable gift when calculating their gift tax for the year of the transfer. D.The transferor (or the transferor’s estate, for direct skips at death) is liable for the GSTT on a direct skip, unless the direct skip is made from a trust.
Solution: The correct answer is C.
If both gift tax and GST taxes are due, the transferOR must include the GSTT paid as an additional taxable gift when calculating their gift tax for the year of the transfer.
Choice A, B, and D are all true statements concerning the taxation to direct skips.
