Generation-Skipping Transfer Tax Flashcards
Generation Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) was enacted to prevent wealthy individuals from creating trusts that last through multiple generations in order to avoid transfer taxes between each of the generations. Currently, the generation-skipping transfer tax allows a total of $11,400,000 (2019), exemption per transferor (the person transferring the assets) for transfers to people who are two or more generations below the transferor. Without proper planning, transferring amounts in excess of the GST exemption amount would create a GST tax equal to the maximum federal estate tax rate.
Generation Skipping Transfers
Under federal law, a transfer of property by gift or at death to any person who is two or more generations below that of the transferor is called a generation-skipping transfer. A person who is two or more generations below that of the transferor is called a skip person. Generation-skipping transfers can be made through a will or by establishing a generation-skipping trust. If a generation-skipping trust is created as part of an individual’s will or revocable trust upon the death of the grantor, then it comes into existence only at the death of the transferor. Note: 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.
Three Types of Generation Skipping Transfers
Taxable Distribution
Taxable Termination
Direct Skip
Direct Skip
A transfer subject to an estate or gift tax made to a skip person
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, 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
What is a GST?
A generation-skipping transfer (GST) is any transfer of property by gift or at death to any person who is assigned to a generation that is two or more generations below that of the transferor, the transferor’s spouse or ex-spouse. The donee or recipient of the gift who is two or more generations below the transferor is known as the “skip person”. Skip persons can be grandchildren, great-grandchildren, grand-nieces, and grand-nephews. However, if a grandchild’s parent has died, that grandchild is no longer a skip person. Instead, the predeceased parent rule applies and the grandchild takes his parent’s place in lineage.
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).
Every trust has an inclusion ratio that determines the portion of each future distribution or termination that will be subjected to the GST tax. Which of the following statements are correct?
A. An inclusion ratio of “zero” means that the trust will always be exempt from the GST tax.
B. An inclusion ratio of “one” means that all taxable distributions and taxable terminations will be fully subject to the GST tax.
C. An inclusion ratio of 1/2 means that one-half of all taxable distributions to a transferor’s child will result in a GST Tax.
Correct Answers: A. and B.
Explanation: An inclusion ratio of 1/2 means that one-half of all taxable distributions and taxable terminations will result in a GST Tax. GST tax does not pertain to a transferor’s child, only to those who are two or more generations below the transferor. An inclusion ratio of “zero” means that the trust is totally exempt from the GST tax and an inclusion ratio of “one” means that all taxable distributions and taxable terminations will be fully subject to the GST tax.
Which of the following may be circumstances where GST techniques can be applied?
A. Client wishes to make a gift to grandchildren directly.
B. Client wishes estate to be distributed to children and their spouses.
C. Client wishes to provide income for children and distribute assets to subsequent generations.
D. Client wants to avoid transferring assets to children’s already large estates
Correct Answers: A., C. and D.
Explanation: GST planning may help clients who have wealthy children and do not wish to increase their children’s estates, clients who would like to create a trust to generate income for children but preserve principal for subsequent generations, and clients who would like to make a direct transfer to skip persons.
Who may be considered a skip person?
A. A great-grandchild
B. A grand-nephew
C. A wife who is 38 years younger than the transferor
D. A business partner who is 40 years younger than the transferor
E. A grandchild whose parent has died
Correct Answers: A, B and D.
Explanation: Skip persons can be 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, like the business partner in this example, they are considered to be a skip person. A grandchild whose parent has died takes their parent’s place in lineage and is not a skip person.
Taxable Termination
A taxable termination is essentially the 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.
Which of the following is NOT a generation-skipping transfer?
A. Direct skip
B. Taxable distribution
C. Taxable termination
D. Taxable redemption
Correct Answer: D. Taxable redemption
Explanation: A direct skip, taxable distribution and taxable termination are generation-skipping transfers. An estate tax is equal to the maximum estate tax rate at the time a taxable distribution, taxable termination or direct skip is made. A taxable redemption is not a generation-skipping transfer.
Assuming a GST exemption is not allocated to a trust, which party is responsible for paying a GST tax when a distribution is made to a skip person beneficiary?
A. The transferor/grantor
B. The trustee
C. The beneficiary
Correct Answer: C. The beneficiary
Explanation: The beneficiary is obligated to pay the GST tax in a taxable distribution. The recipient can deduct the GST tax paid on the distribution on his own personal income tax return. The tax is tax inclusive, meaning the distributed amount is reduced by the amount of GST tax the beneficiary must pay.
Choose all options that are true regarding GST tax.
A. GST tax is in addition to any lifetime taxable gifts made to skip persons.
B. All GSTT are inclusive.
C. A GST tax must be paid from assets that are subject to the federal estate tax if a direct skip is made at death.
D. The total tax will be greater than 100% if the applicable rates of the gift or estate tax are 55%.
Correct Answers: A., C. and D.
Explanation: GST tax on lifetime gifts is considered as taxable gifts. If there is a direct skip at death then the GST tax is paid from the assets that are subject to federal estate tax. If the applicable rate of the gift or the estate tax is greater than 55%, then the total tax will be greater than 100%.
