Generation Skipping Transfer Tax
INTRODUCTION AND ISSUE
The United States generation skipping transfer tax imposes a tax on gifts and transfers to people more than one generation younger than the donor. An example is a grandparent giving a gift to a grandchild, in turn skipping their own child. Grandparents would give a gift to their grandchildren to avoid or defer federal gift taxes, but this is now subject to a generation skipping tax.
Congress passed the original generation-skipping transfer tax in 1976 to go along with the federal gift and estate tax system to make sure that the transfer of wealth from one generation to the next would have the same tax effects. The most common tax ...view middle of the document...
APPLICABLE LAW – PRIMARY AUTHORITY
INTERNAL REVENUE CODE
The term “generation-skipping transfer” is a taxable distribution, a taxable termination and a direct skip, according to the Internal Revenue Code . The IRC defines a taxable distribution as any distribution from a trust to a skip person. The IRC defines taxable termination, in this context, as the termination by death, lapse of time or otherwise of an interest in property held in a trust.2 The IRC defines a direct skip or skip person as a natural person assigned to a generation which is two or more generations below the generation of the transferor. The generation skipping transfer does not include any transfers that would not be treated as a taxable gift for any reason; any transfers to the extent that the property transfer was subject to a prior tax imposed, or the transferee was assigned the same generation as the generation assignment of the transferee.
The general rule for the valuation of property is that the value at the time of the generation-skipping transfer will be used. The “applicable rate” for generation-skipping transfer is the product of the maximum Federal estate tax rate and the inclusion ration with respect to the transfer.
The generation that an individual belongs is determined within set rules of the Internal Revenue Code. An individual that is a direct descendant of a grandparent will be assigned to the generations that result from the number of generations between the grandparent and that individual. An individual that is descendant of a grandparent of a spouse will be assigned to the generations that result from the number of generations between the grandparent and that individual as well. An individual that has been married to the transferor will be assigned the transferor’s generation.6
An individual who is not assigned a generation because they are not a direct descendant or a spouse of a descendant will be assigned a generation by different rules. Any individual that is born less than 12 ½ years after the transferor will be assigned to the transferor’s generation. Any individual born more than 12 ½ years but less than 37 ½ years after the transferor will be assigned to the first generation younger than the transferor. There will be a new generation every 25 years.6
The generation skipping tax could apply to gifts given during an individual’s life or transfers that occur at the time of their death, a bequest, made to skip persons. The generation skipping transfer tax is calculated on the amount of the gift or bequest transferred to a skip person, after subtracting any exemption allocated to the gift at the maximum gift and estate tax rates. Every individual has an exemption equal to the basic exclusion amount for the year involved. An exemption of 5,250,000 for 2013 is provided for individuals making...