Generation-Skipping Transfer Tax (GSTT)

 What is the Generation-Skipping Transfer Tax (GSTT)?

The GSTT applies to gifts (during life) and bequests (upon death) made to a person who is two or more generations younger (“skip person”) than the one making the gift. For relatives, the generations are defined by the family lines (e.g. children are the first generation, grandchildren-grandnieces-grandnephews are the second, etc.) If the recipient is not related to the transferor, generations are assigned according to the person’s age (e.g. the first generation is between 12-1/2 and 37-1/2 years younger). For simplicity, I will refer to the second generation beneficiary as a “grandchild” and the transferor as the “grandparent.”

Trusts can also be “skip persons.” This occurs when all of the trust beneficiaries are two or more generations younger than the person funding the trust. This can also occur when a charity is a beneficiary, and all other beneficiaries are skip persons. An example would be a trust set up to pay a charity for a period of time, with the remainder paid to the grandchildren. The trust is a “skip person,” and trust contributions are subject to GSTT.

The GSTT is imposed on three types of gifts or bequests (“transfers”): “direct skips,” “taxable distributions,” and “taxable terminations.” The GSTT is payable by the grandparent for a direct skip, and by the trustee for a taxable termination. The grandchild pays the tax on a taxable distribution.

https://www.lommen.com/getdoc/71f765f4-425a-470a-84d6-ab15d6463d36/Generation-Skipping-Tax.aspx

 What is the Generation-Skipping Transfer Tax (GSTT) exemption?

Numerator (GST exemption).   Every individual settlor is allowed a lifetime GST exemption to be allocated against property that the individual has transferred. For generation-skipping transfers made through 1998, the exemption was $1 million. The GST exemption amounts for 1999 through 2014 are as follows: 

Now the new limit of 11.2 million applies for 2018 moving forward.

For existing trusts, transferors may allocate the additional GST exemption amount attributable to section 2631(c) increases if they otherwise qualify under the existing rules for late allocations. For more information, see section 2632 and Multiple transfers into a trust later.

  Once made, allocations are irrevocable.

Allocation of the GST exemption is made by the settlor on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and/or Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, by the executor of the settlor's estate. Therefore, you should obtain information regarding the allocation of the exemption to this trust from the settlor or the executor of the settlor's estate, as applicable.

If the settlor's entire GST exemption is not allocated by the due date (including extensions) of the settlor's estate tax return, the exemption is automatically allocated under the rules of section 2632.

Transfers subject to an estate tax inclusion period.   If a transferor made an inter vivos transfer, and the property transferred would have been includible in the transferor's estate if he or she had died immediately after the transfer (other than by reason of the transferor dying within 3 years of making the gift), for purposes of determining the inclusion ratio, an allocation of GST exemption will only become effective at the close of the estate tax inclusion period (ETIP).

  The value of the property for the purpose of figuring the inclusion ratio is the estate tax value if the property is included in the transferor's gross estate, or its value at the close of the ETIP.

  The ETIP closes at the earliest of:

  1. The time the transferred property would no longer be includible in the settlor's estate,

  2. The date of a generation- 
    skipping transfer of the property, or

  3. The date of death of the settlor.

Denominator (valuation of trust assets).   In general, the value to be used in the applicable fraction is the gift tax value for an inter vivostransfer as long as the allocation of the GST exemption was made on a timely filed gift tax return. The value of a testamentary transfer is generally the estate tax value.

  If the allocation of the exemption to an inter vivos transfer, made before January 1, 2001, is not made on a timely filed gift tax return, the value for purposes of the applicable fraction is the value of the property transferred at the time the allocation is filed with the IRS.

Qualified terminable interest property.

For qualified terminable interest property (QTIP) that is included in the estate of the surviving spouse of the settlor because of section 2044, unless a special QTIP election has been made under section 2652(a)(3), the surviving spouse is considered the transferor under section 2652(a) for GST purposes, and the value is the estate tax value in the estate of the surviving spouse.

A special QTIP election allows property for which a QTIP election was made for estate or gift tax purposes to be treated for GST tax purposes as if this QTIP election had not been made. If the special QTIP election has been made, the predeceased settlor spouse is the transferor and the value is that spouse's estate or gift tax value under the rules described above. Either the settlor spouse or the executor of the settlor spouse's estate must make the special QTIP election.

ETIP.

If an individual could not make a timely allocation of exemption because of an ETIP, the value of the property for the purpose of computing the inclusion ratio is the estate tax value if the property is includible in the transferor's gross estate. If the property is not includible in the transferor's gross estate, the property is valued at the close of the ETIP, provided that the GST exemption is allocated on a timely filed gift tax return for the calendar year in which the ETIP closes.

Multiple transfers into a trust.   When a transfer is made to a pre-existing trust, the applicable fraction must be recomputed. The numerator of the new fraction is the sum of:

  1. The exemption allocated to the current transfer and

  2. The nontax portion of the trust immediately before the current transfer (the product of the applicable fraction and the value of all of the property in the trust immediately before the current transfer).

  The denominator of the new fraction is the sum of:

  1. The value of the current transfer (minus any federal estate tax or state death tax actually paid by the trust attributable to such property) and any charitable deduction allowed with respect to such property and

  2. The value of all property in the trust immediately before the current transfer.

Charitable lead annuity trusts.   For distributions from a charitable lead annuity trust, the numerator of the applicable fraction is the adjusted GST exemption as defined below. The denominator is the value of the trust immediately after termination of the charitable lead annuity.

  The adjusted GST exemption is the sum of:

  1. The exemption allocated to the trust and

  2. Interest on the exemption determined at the interest rate used to figure the estate or gift deduction for the charitable lead annuity and for the actual period of the charitable lead annuity.

  In the case of a late allocation, the amount of interest accrued prior to the date of allocation is zero.

http://www.irs.gov/instructions/i706gsd1/ch02.html

 What is the GST tax rate?