The GSTT occurs when a taxable transfer is made to a beneficiary that is more than one generation below that of the gift giver.
Skip Beneficiary can be either of the following:
- A person that is at least two generations below the transferor, or
- A trust where the beneficiaries are two generations below the gift giver and from which no next generation person will benefit.
- Grandparent transfers property to a grandchild
- Grandchild would be a skip beneficiary
- Parent would be a non-skip beneficiary (next generation)
Grandchild with a deceased parent would not be a skip beneficiary of a transfer from the grandparents.
Taxes are imposed on three possible events: direct skips, taxable distributions and taxable terminations.
A direct skip is a straight transfer to a skip beneficiary, like a grandfather to a grandson. This can be accomplished by directly passing the gift or through the use of a trust.
Direct Skip Trusts include:
- No portion of the income or principal can be distributed to anyone else during the beneficiary's lifetime.
- The trust benefits only one individual.
- The principal is included in the beneficiary's estate should they die prior to the trust's termination date.
The transferor (or the estate of the transferor) is liable for the GSTT on direct skips.
A taxable distribution is any distribution of either income or corpus from a trust to a person two or more generations under the trust settlor's generation.
What makes this a GSTT taxable event?
- If the distribution escaped federal estate and gift taxation at the first generation level below the original transferor.
Liability falls on the skip beneficiary, not the trustee.
- Taxable amount is the amount received less any amount paid by the beneficiary to acquire the property.
A taxable termination occurs when there is a termination of a property interest that is held in trust which results in a skip beneficiary holding the property interests of the trust. There are several different ways that the termination might occur, some of which might be a release of power, lapse due to time or death.No taxable termination occurs if:
- Estate or gift tax is paid on the trust property one generation below the transferor at the time of termination.
- At least one non-skip beneficiary has an interest in the property.
- The skip beneficiary could not receive a distribution after the termination.
What is taxable?
The value of all property involved reduced by any amounts paid by the beneficiary (recipient) for the expenses, debts, income and property taxes for the property received.
Exemptions and Exclusions from the GSTT
RetirementA beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
Financial AdvisorIt definitely matters who you pick as your IRA beneficiary—and how you go about it. And in some cases, your best option may be to go with a trust.
Financial AdvisorCreating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
RetirementTo take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
RetirementToo many people make huge and irreversible mistakes when naming the beneficiaries for their retirement accounts.
Managing WealthYou don't have to be rich to make use of a trust fund. Rules can be complex; here's what you'll need to discuss with your lawyer.
Managing WealthTrusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
RetirementLife changes make it time to rewrite your plan's designations.
RetirementMake sure your beneficiary designations not only reflect your intentions but also meet the requirements to be effective.
Financial AdvisorBeneficiary designations are a critical financial planning step that can be easily overlooked. Here's how to ensure they are properly done.