Generation-Skipping Transfer Tax - Identify Transfers Subject to the GSTT

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:
  1. A person that is at least two generations below the transferor, or
  2. A trust where the beneficiaries are two generations below the gift giver and from which no next generation person will benefit.

Example:

  • Grandparent transfers property to a grandchild
  • Grandchild would be a skip beneficiary
  • Parent would be a non-skip beneficiary (next generation)

Exception:
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.

Direct Skips
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.

GSTT Tax?
The transferor (or the estate of the transferor) is liable for the GSTT on direct skips.

Taxable Distributions
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.

GSTT Tax?
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.

Taxable Terminations
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
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