What is GST Tax? By Yahne Miorini, LL.M.

The main concern of gifting with the remainder payable to  A taxable distribution is any grandchildren is that the gift may be the transferor’s grandchild. distribution of either income subject to Generation Skipping Tax Upon the death of the or principal from a trust to a (GST). The current GST tax has a transferor’s (“non-skip “skip person,” other than a rate of 45% and its exemption amount person”) there will occur a “taxable termination” or a is $2,000,000 ($3,500,000 in 2009). taxable termination because the “direct skip.” For instance, a The Economic Growth and Tax Relief interest of the transferor’s child transferor established a trust, Reconciliation Act of 2001 in the trust will terminate in which pays income to his/her (EGTRRA) has scheduled to reset the favor of the transferor’s child for life, and one-half of GST on December 31, 2010 to be grandchild (a “skip-person”). the principal to his/her equal to $1,000,000 adjusted inflation  A direct skip is an immediate grandchild, when the to the year 2011 with a maximum transfer of an interest in grandchild attains the age 35. federal estate tax rate of 55%. property to a “skip person,” The payment to the grandchild which is subject to the gift tax upon attaining the age of 35 What is a Generation‐Skipping or to the estate tax. A direct constitutes a taxable Transfer? skip occurs if a distribution since the transfer Under section 2611(a) the IRC makes an outright transfer of is a transfer to a skip person, defines three new concepts: a taxable property to his/her grandchild which is neither a taxable termination, a direct skip, and a or when a grandparent termination nor a direct skip. taxable distribution. transfers property to a trust for Another example: a transferor  A taxable termination occurs the sole benefit of his/her established a discretionary when, the interest of a “non- grandchild. A direct skip may trust for the benefit of his/her skip” person” in property held results in both a federal gift , children, and in a trust terminates in favor of a tax or a federal estate tax and grandchildren. The trustees “skip person” as a result of a a GST tax. However, a gift of choose to make a death, the lapse of a period of a remainder interest to a skip discretionary payment of time, the release of a power or person does not count as an income to one of the otherwise. For instance, a interest taxable as a direct skip transferor’s grandchildren; the (“transferor”) establishes because future interests are payment is a taxable a trust for the benefit of his/her not currently taxable. distribution since it is a child during the child’s lifetime transfer to a skip person which

Excerpts from teaching class, NBI 2008. All Copyrights Reserved. What is GST Tax? By Yahne Miorini, LL.M.

is neither a taxable individual who is not more than 12 termination nor a direct skip. ½ years younger than the transferor is assigned to the same generation What is a skip? as the transferor, and therefore is A direct skip person is either not a skip person. An individual an individual assigned to a generation who is more than 12 ½ years that is two or more generations below younger than the transferor, but the generation assignment of the who is not more than 37 ½ year transferor (i.e., a grandchild), or a younger than the transferor is trust if: (1) all interests therein are deemed to be one generation held by skip persons; or (2) there is younger than the transferor, no person with an interest in the trust therefore, is not a skip person. A who is, and at no time may a skip person is an individual who is distribution be made to, a non-skip more than 37 ½ years younger than person. the transferor. However, a spouse A skip person would be a of the transferor is deemed to be in lineal descendant of the transferor or the same generation as the transferor’s spouse (or former transferor, regardless of the parties’ spouse), such as a grandchild, a great- relative ages. Finally, there is an nephew or a great-niece. Adoptive exception for deceased . relationships are deemed to be the When a parent has predeceased, equivalent of blood relationships, the donee takes the place of the same for half-blood relationships. parent for the calculation of When the donee is not a generation. member (non lineal descendants),

the IRS is looking at the difference of age between the donee and the transferor. The transferor is assigned to a generation level based upon a deemed separation of generations every 25 years. An

Excerpts from teaching class, NBI 2008. All Copyrights Reserved.