Chapter 20 - The Generation-Skipping Transfer Tax Flashcards
Generation Skipping tax
40% flat rate imposed on: - Gifts - Bequests - Transfers - Distributions To individuals known as skip beneficiaries
Skip Beneficiary
- A person two or more generations below transferor. If unrelated, there must be a 37.5 year age difference.
- A trust who has skip beneficiaries also qualifies as a skip beneficiary.
Direct Skip
Outright transfers during life time or at death.
Taxable Distribution
If you have a trust which pays out income to a skip beneficiary.
Taxable Termination
The trust closes and pays out to a skip beneficiary.
Exclusions on the generational skipping transfer tax
- Life time federal exclusion ($11.4M/person)
- $15k annual gift exclusion
- Unlimited educational/medical expenses exclusion (must be direct to vendor)
GSTT
generational skipping transfer tax
GSTT tax rate
40%
GSTT liability
Direct Skip - Transferor or estate is liable for paying the tax
Taxable Distribution - Transferee (Beneficiary) is liable for paying the tax
Taxable Termination - Trustee is liable for paying the tax
ILIT
Irrevocable Life Insurance Trust
A direct skip is a taxable transfer to a skip person or to a trust with only one skip beneficiary?
True
For GSTT distributions, the liability falls on the transferee?
True
The GSTT is calculated in the same way as the gift and estate tax except for the GSTT $5.45 million lifetime and at-death exemption amount?
False
The GSTT is calculated by an unusual process that is very different from the gift and estate tax calculation. The GSTT rate of 40 percent is multiplied by an inclusion ratio that is determined by a formula.
Any remaining GSTT exemption upon the donor’s death can be left to the surviving spouse if property identified on the final estate tax return?
False
The GSTT exemption cannot be left to the surviving spouse like the traditional lifetime exemption can be.
Because the GSTT exemption amount is available to both spouses (ignoring the annual, medical, and educational exclusions), a married couple can transfer to skip persons twice the lifetime exception available to single individuals without having to pay GSTT?
True
Either the GSTT or the regular estate or gift tax, but not both, will apply to a transfer to a grandchild?
False
The GSTT is applicable to transfers that are also subject to estate or gift taxes. Thus, a gift to a grandchild could be subject to both GSTT and gift tax.
If the GSTT exemption is not allocated by a decedent’s executor, the IRS must allocate it in a manner that results in the lowest GSTT liability?
False
The IRS allocates the exemption by mechanical default rules, and the actual tax results may be less than optimal.
A trust that is only partially exempt from the GSTT due to the incomplete allocation of the GSTT exemption will face increased administrative fees because of the added complexity of having an inclusion ratio other than zero or one?
True
The annual per-donee gift tax exclusion is available for transfers to a generation-skipping trust if Crummey withdrawal powers are given to the beneficiaries in the same manner as for annual gift tax exclusion transfers?
False
The annual exclusion for GSTT is more restrictive than the gift tax annual exclusion for generation-skipping gifts in trust. Such gifts will be permitted an annual exclusion for GSTT purposes only if the trust limits distribution of income and corpus to a single beneficiary and provides that the corpus will be included in the estate of the beneficiary if he or she dies prior to the termination of the trust.
All benefits paid from an irrevocable life insurance trust will be exempt from GSTT if all annual premiums made to the trust were sheltered by the GSTT exemption or exclusion?
True
The GSTT is imposed on lifetime or testamentary transfers that are direct skips, taxable distributions, or taxable terminations?
True
An irrevocable life insurance trust can be an effective device for transferring substantial wealth to a skip beneficiary and avoid the GSTT by using the lifetime exemption and annual exclusions?
True
Substantial transfers are exempt from the GSTT since a basic credit amount is available to shelter generation-skipping transfers from tax?
False
The basic credit amount provided for estate or gift tax is not available for generation skipping transfers. However, there is a lifetime and testamentary cumulative GSTT exemption amount for such transfers.
In general, the GSTT applies when a taxable transfer is made to a transferee more than one generation level below the transferor?
True
