Generation-Skipping Transfer Tax
The federal generation skipping transfer (GST) tax is imposed on substantial wealth transferred between generations. The GST tax is an extremely complicated system meant to fill what was once a gap between the federal estate tax and the federal gift tax.
If the normal order of things were followed, the estate tax would apply to each successive generation. For example, Father, by will, gives Son $10,000,000; at his death, the Son gives the $10,000,000 to Grandson (his son). The tax collector would assess tax when Father transferred the money to Son, and again when Son transferred the money to Grandson. Thus, the amount from Father to Son would be reduced by the estate tax assessed, and the amount from Son to Grandson would be reduced once more by a second assessment of estate tax.
Before the enactment of the GST tax, extremely wealthy individuals (usually those having a net worth of several million dollars) would sometime set up a bequest like this: During his lifetime, or in his will, Richard Bigbucks gives his grandchild $10,000,000. Although this bequest is subject to the federal estate or gift tax, Richard manages to get the money to the grandchild without the extra round of taxes that would have been collected had the money first been given to his son and then transferred by him to the grandson.
The GST tax exemption amount, which is computed by reference to the estate tax applicable exclusion amount, is $5 million (adjusted for inflation after 2011) for GSTs occurring after 2009. Anything above that would be subject to the GST. If you think that you are in a position where you estate is large enough that you may leverage the GST provisions, then contact a high-end estate planning professional. Even within the realm of estate planning and tax law, the GST provisions are complicated!
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