What is the Generation-Skipping Transfer (GST) tax?
The GST tax is one of three separate transfer taxes, along with estate and gift taxes, each with their own rules and regulations.
What triggers the GST tax?
There are three types of generation-skipping transfers that will trigger the GST tax.
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- Direct Skip – transfers directly to a skip person (defined below)
- Taxable Distributions – transfers to a skip person from a trust
- Taxable Terminations – termination of an interest in property held in trust unless a) immediately after the termination, a non-skip person has an interest in the property or b) at no time after the termination will a distribution be made from the trust to a skip person. A taxable termination arises, for example, when a trust is set up for the benefit of the transferor’s child (non-skip person) for their lifetime, and at the child’s death, the trust is retained for the child’s children (transferor’s grandchildren).
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Who is a skip person?
Generally, skip persons are individuals assigned to a generation two or more generations below the transferor – some examples include:
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- A grandchild, great-niece or great-nephew, great-grandchild
- A non-relative who is more than 37.5 years younger than the transferor/li>
- A trust in which all the beneficiaries are skip persons
- A trust without any current beneficiaries but set up to only ever make distributions to skip persons
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Are there any exceptions to skip person rules?
Something to be aware of is the Predeceased Ancestor Rule which changes the typical generation assignment. For instance, if a child predeceases the transferor, that child’s children (transferor’s grandchildren) will “move up” one or more generations, will no longer be considered skip persons, and therefore will not be subject to the GST tax. Although beyond the scope of this article, the family and non-family rules differ and there are several matters to consider when determining if an individual is a skip person or not in relation to the transferor.
Is there an exemption/exclusion for GST tax?
Like the estate and gift taxes, there are exemptions and exclusions applicable to GST tax to be mindful of. For example, certain gifts that qualify for the annual gift tax exclusion, currently capped at $16,000 per donee, may also be eligible for the annual GST tax exclusion. In addition, there is a lifetime GST tax exemption that is presently set at $12,060,000 per transferor.
Because of the rules and complexities surrounding the GST tax, individuals should consult with advisors who are knowledgeable in this area. Boulay has professionals available with an understanding of the fundamentals surrounding the GST tax and can help you and your family with your estate and trust planning needs.
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