Archive » August 17, 2006
By Gary Bartick
BASICS AND BENEFITS OF GENERATION SKIPPING
GST is not a food flavor enhancer with dangerous health effects and it isn’t an acronym for a nasty pesticide. But it can have unwanted impacts on your estate plan unless you’re not careful.
The Generation Skipping Transfer Tax is a transfer tax, like the estate tax and the gift tax, that applies to certain transfers of money or property between different generations. In the field of planned giving, GST comes into play whenever you make a donation that will benefit both charity and your grandchildren. If you are planning to fund gift annuities, charitable remainder trusts, charitable lead trusts or other planned gifts that eventually benefit your grandchildren, you need to know the basics of GST.
GST, as its name suggests, applies to gift transfers (but not sale transfers) between people that are more than one generation apart – where a generation is "skipped." The most common example of a generation skipping transfer is a gift from a grandparent to grandchild, but GST applies whether the donor and gift recipient are related or not.
GST applies to three types of generation skipping transfers: direct skips, taxable distributions and taxable terminations. A direct skip occurs when a grandparent directly gives a grandchild a gift (rather than making a gift through a trust).
Grandma Gertrude gives Granddaughter Greta a check for $100,000. Because Grandma Gertrude and Granddaughter Greta are more than one generation apart, the gift is a "direct skip."
A taxable distribution occurs when a trust created by a grandparent distributes money to a grandchild (or any younger generation). Grandfather Godfrey creates a trust that gives income to his son, Samuel. The trustee of the trust is also permitted to give income to Samuel's children, Courtney and Charlie. Anytime Courtney or Charlie receives income from the trust, a “taxable distribution” occurs. This is because the trust is distributing money to Courtney and Charlie, who are more than one generation younger than Grandfather Godfrey.
Finally, a taxable termination occurs whenever a trust created by a grandparent changes so that grandchildren have all of the current interest in the trust. Grandmother Galinda creates a trust for her daughter Linda. The trust will distribute income and principal to Linda as needed during her lifetime. When Linda dies, her children (Galinda's grandchildren) will benefit from the trust. Until Linda dies, Galinda's grandchildren don't have a confirmed interest in the trust. After Linda dies, the grandchildren are the only beneficiaries. Since all of the money in the trust will benefit Galinda's grandchildren when Linda dies, Linda's death is a "taxable termination."
The GST tax rates are the same as the estate tax rates. Under current law, these rates are as follows:
Year Highest Estate and GST Tax Rate
2010 No GST Tax
There are two possible ways that a grandparent can make a gift to a grandchild without paying GST tax. The first is using the annual GST exclusion. The second is by applying the GST Exemption Amount.
In 2006, the annual gift exclusion allows a grandparent to give $12,000 to every grandchild (or any other person) without paying gift tax. (The $12,000 is indexed for inflation). Any gifts that fall within this annual gift exclusion are also exempt from the GST.
Every person can make a certain amount of generation skipping transfers during life or at death that are exempted from GST tax. This amount differs by year and is called the "GST Exemption Amount." Under current law, the GST Exemption Amounts are as follows:
Year GST Exemption Amount
2006 $2 million
2007 $2 million
2008 $2 million
2009 $3 million
2010 No GST Tax
2011 $1.1 million
These are just a few of the basics on Generation Skipping Transfers. If considering a crucial financial decision, it is wise to first consult an experienced advisor in this field.
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