Definition
A Generation-Skipping Transfer (GST) is a transfer of financial assets or property to a recipient who is at least one generation younger than the transferor. This typically refers to transfers made to grandchildren or even great-grandchildren, bypassing the transferor’s children. The primary reason people opt for GST is to reduce the number of times gift or estate taxes must be paid as the assets are passed down through generations. However, the IRS imposes a Generation-Skipping Transfer Tax (GSTT) to mitigate potential loss in tax revenue from such transfers.
Examples
Grandfather to Grandchild: A grandfather transfers shares of stock valued at $100,000 directly to a grandchild instead of his children.
Great-Aunt to Great-Nephew: A great-aunt leaves her villa to her great-nephew, bypassing the nephews and nieces.
Trust Distribution: A trust is set up to provide for the education of a descendant’s grandchildren, skipping the children.
Frequently Asked Questions (FAQs)
What is the Generation-Skipping Transfer Tax (GSTT)?
The GSTT is a federal tax applied to transfers involving individuals who are more than one generation below the transferor. This tax ensures that the skipped generation does not avoid estate or gift taxes.
Who pays the GSTT?
Typically, the donor (transferor) or the estate of the donor is responsible for paying the GSTT. However, the recipient might be liable in certain instances if the tax is not paid by the donor.
Are there any exemptions to the GSTT?
Yes, the IRS provides an exemption limit which allows certain amounts to be transferred without incurring the GSTT. For 2023, the exemption limit is $12.92 million per individual.
How is the GSTT calculated?
The GSTT is calculated by multiplying the fair market value of the transferred assets by the current GST tax rate (40% as of 2023), after considering any applicable exemptions.
Can the GSTT apply to both direct and indirect transfers?
Yes, the GSTT applies to both direct transfers (gifts or bequests directly to a grandchild) and indirect transfers (distributions from a trust).
Related Terms
Estate Tax: A tax levied on the net value of the estate of a deceased person before distribution to heirs.
Gift Tax: A tax imposed on the transfer of ownership of property during the transferor’s life.
Trust: A fiduciary relationship in which a trustee holds property on behalf of a beneficiary.
Beneficiary: The person entitled to receive assets from a trust, will, or life insurance policy.
Online Resources
Suggested Books for Further Studies
- “IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out” by Twila Slesnick and John C. Suttle
- “J.K. Lasser’s Your Income Tax” by J.K. Lasser Institute
- “The Complete Book of Trusts” by Martin M. Shenkman
Fundamentals of Generation-Skipping Transfer: Estate Planning Basics Quiz
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