Chapter 20 - The Generation-Skipping Transfer Tax

Question 1

Generation Skipping tax

Answer 1

40% flat rate imposed on:
- Gifts 
- Bequests 
- Transfers
- Distributions
To individuals known as skip beneficiaries

Question 2

Skip Beneficiary

Answer 2

• 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.

Question 3

Direct Skip

Answer 3

Outright transfers during life time or at death.

Question 4

Taxable Distribution

Answer 4

If you have a trust which pays out income to a skip beneficiary.

Question 5

Taxable Termination

Answer 5

The trust closes and pays out to a skip beneficiary.

Question 6

Exclusions on the generational skipping transfer tax

Answer 6

• Life time federal exclusion ($11.4M/person)
• $15k annual gift exclusion
• Unlimited educational/medical expenses exclusion (must be direct to vendor)

Question 7

GSTT

Answer 7

generational skipping transfer tax

Question 8

GSTT tax rate

Answer 8

40%

Question 9

GSTT liability

Answer 9

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

Question 10

ILIT

Answer 10

Irrevocable Life Insurance Trust

Question 11

A direct skip is a taxable transfer to a skip person or to a trust with only one skip beneficiary?

Answer 11

True

Question 12

For GSTT distributions, the liability falls on the transferee?

Answer 12

True

Question 13

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?

Answer 13

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.

Question 14

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?

Answer 14

False

The GSTT exemption cannot be left to the surviving spouse like the traditional lifetime exemption can be.

Question 15

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?

Answer 15

True

Question 16

Either the GSTT or the regular estate or gift tax, but not both, will apply to a transfer to a grandchild?

Answer 16

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.

Question 17

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?

Answer 17

False

The IRS allocates the exemption by mechanical default rules, and the actual tax results may be less than optimal.

Question 18

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?

Answer 18

True

Question 19

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?

Answer 19

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.

Question 20

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?

Answer 20

True

Question 21

The GSTT is imposed on lifetime or testamentary transfers that are direct skips, taxable distributions, or taxable terminations?

Answer 21

True

Question 22

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?

Answer 22

True

Question 23

Substantial transfers are exempt from the GSTT since a basic credit amount is available to shelter generation-skipping transfers from tax?

Answer 23

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.

Question 24

In general, the GSTT applies when a taxable transfer is made to a transferee more than one generation level below the transferor?

Answer 24

True