Manish C. Bhatia

The Generation Skipping Transfer (GST) Tax is an extremely complex provision of the Tax Code and will vary greatly based on the details of each transfer.  In order to discourage individuals from making gifts to grandchildren and beyond (“skip persons”) in order to avoid the Estate Tax at the child-level, the IRS imposed the GST Tax.  While the tax can be significant, there are several exclusions that can be utilized in order to minimize the effects of the GST Tax.

Perhaps the most important exclusion from GST Tax is the lifetime exemption.  This exemption has been indexed for inflation since 1997 and was $3,500,000 in 2009.  For 2011 and 2012, the lifetime GST exemption is $5 million.   Gifts that are non-taxable for Gift Tax purposes are generally exempt from GST Tax as well.  This includes direct gifts under the annual Gift Tax exclusion amount ($13,000 in 2011) or gifts for education or medical services. However, there are several exceptions to the standard rules for transfers that may subject or exclude a transfer from GST Tax liability.

First, gifts using the donor’s annual Gift Tax tax exclusion are generally exempt from GST Tax.  However, a transfer using the annual Gift Tax exclusion to a pot trust for the benefit of a group of skip persons is not exempt from GST Tax, even if the beneficiaries have a right of withdrawal over such assets.  In order for such a transfer to be GST exempt, the skip person must be the only beneficiary of such trust.

Example: Adam wants to establish a pot trust for the benefit of his grandchildren in order to make gifts using his annual Gift Tax exclusions while the grandchildren are minors.  Adam will gift $13,000 per grandchild to the trust.  While such gifts will be exempt from Gift Tax and will remove the assets from Adam’s taxable estate, the gifts will not be exempt from GST tax.  In order to avoid incurring GST Tax liability, Adam must either (a) establish a separate sub-trust for each grandchild, or (b) apply his lifetime GST Tax exclusion to each gift.

Second, the children of a predeceased child are not considered skip-persons.

Example: Adam’s son, Brian died last year.  Brian was survived by a daughter, Carol.  Adam decides to make a gift of $25,000 to Carol.  This gift is exempt from GST Tax under the predeceased child exemption.

For additional questions and further details regarding the Generation Skipping Transfer Tax, please contact me at your convenience.