Donald M. Thompson - Wills, Trusts, and Estate Planning

WILLS, TRUSTS, AND ESTATE PLANNING

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Generation-Skipping Tax (GST)

People can give property directly to their grandchildren and keep the property out of their children's taxable estates. Because of this Congress enacted the generation-skipping tax on lifetime or death gifts which skip a generation. There is a $5,250,000 exemption. Married couples can treat a transfer as made by one-half by each spouse. In effect, this doubles the exemption. Over the exempt amount the rate of tax is 35%. Additionally, often gifts that would qualify for the annual exclusion under the gift tax are not subject to the generation-skipping transfer tax. There are additional rules for getting this exemption when the gift is made to a trust. The tax is in addition to the estate tax.

The tax applies to any transfer from a "transferor" to a "Skip" person. A skip person is an individual or a trust. Individuals who are two or more generations below the transferor are skip persons. This includes grandchildren and great grand children and also grand nieces and grand nephews. A trust is a skip person only if non-skip person holds an interest in it and only if no non-skip person may receive a distribution from it. If a transferor's child dies before the transferor the predeceased child's descendants are moved up by one generation.

The transferor is generally the decedent or donor. However, with respect to a marital deduction trust that pays after the death of the surviving spouse to other people, the surviving spouse is the transferor.

The tax applies to three types of transfers. One is a taxable termination. This is a transfer to a skip person upon termination of a trust. Another is a taxable distribution. This is any other transfer from a trust to a skip person. Finally, there is the direct skip which is a transfer directly to the skip person.

The exemption from the tax can be allocated amongst transfers. For instance, if $10,500,000 is going to be transferred in trust it can all be put in one trust with $10,500,000 of assets. Then $5,250,000 of the exemption can be allocated to the transfer. All taxable transfers from the trust to a skip person will incur tax at 50% of the GST tax rate. However, $5,250,000 could be put in one trust (A) and $5,250,000 in another (B). Then $5,250,000 of the exemption could be allocated to Trust A. Trust A would then be totally exempt and all distributions from it would be free of the tax. All distributions from Trust B, if made to a skip person would be subject to the full tax. Obviously Trust A would be set up for skip persons (grandchildren) and Trust A would be for non-skip persons (children).

Usually trusts for skip persons are set up to be entirely exempt. Non-skip persons should not be included. Otherwise the exemption can be wasted. If some of the beneficiaries of the trust are non- skip person unnecessary GST has been incurred. Also if a distribution is later made from the trust to a non-skip person, the exemption has been wasted.

For these reasons, when trusts are used in planning for this tax, a separate trust is set up for the grandchildren and other skip persons. This trust is funded with assets up to the amount of the exemption and no more. Additional funds for the skip persons would be put in a separate wholly taxable trust and a separate trust would be set up for non-skip persons.

The $5,000,000 exemption is not portable from one spouse to another. That is, the amount unused by the first to die can not be added to the $5,000,000 exemption available to the second to die.

 

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email:
donthompsonlaw@sbcglobal.net