Generation Skipping Transfer Tax: Frequently Asked Questions Answered

What is the Generation Skipping Transfer Tax?

The generation skipping transfer tax (“GST tax”) applies to direct and indirect gifts to “skip persons”. Skip persons are related persons in more than one generation below the donor. For example, a gift to a grandchild or great nephew is a generation skipping transfer. If the donor and donee are not related, the donee is a skip person if he or she is at least 37 1/2 years younger than the donor. The GST tax rate is equal to the highest federal estate tax rate – currently 45%.

Are there any exemptions from the GST tax?

Each individual is currently entitled to a GST exemption of $2,000,000 which is applied to both lifetime gifts and transfers after death. In addition, outright gifts to skip persons that qualify for the annual exclusion from gift tax (currently $12,000) as well as direct payments of tuition and medical expenses made on behalf of a skip person are exempt from the GST tax.

This is a very complicated tax! When should I be concerned about it?

Lifetime gifts to skip persons (“direct skips”) are subject to the GST tax. Therefore, you should be concerned about the GST tax if you intend to make a large gift to a skip person (such as a grandchild). Since other future indirect transfers to skip persons may also be subject to the GST tax, you should also be concerned about the GST tax if you make a transfer to a trust that could later benefit a skip person or if your estate is likely to exceed the GST exemption amount. In many cases by proper planning, the GST tax burden can be reduced or eliminated.

What are the income tax consequences of making a gift?

Unlike gifts to charities, gifts to individuals cannot be deducted on the donor’s income tax return. When appreciated property is given away, generally the donee will take the property at the donor’s original cost basis. That is, when the donee sells the property, the donee would have to pay tax on any taxable gain over the donor’s original cost of purchasing the property. In some cases, the capital gains tax on the sale of an appreciated asset may be reduced if the donee can offset the gain with losses or if the donee may treat the property as a capital asset where the donor could not. When income producing property is given away, less income tax may be paid if the donee is in a lower tax bracket than the donor.