Generation-Skipping Transfer Tax

The federal generation-skipping transfer tax is an extremely complicated system meant to fill what was once a gap between the federal estate tax and the federal gift tax, which were meant to levy tax on substantial wealth transferred between generations.

By the normal order of things, this meant that the estate tax would apply to each generation. For example, Father, by will, gives Son $10,000,000; at his death, the Son gives the $10,000,000 (or what's left of it, post-estate tax after Father's death) 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.

Before the enactment of the GST tax, extremely wealthy individuals would sometimes set up a bequest like this: During his lifetime, or in his will, Richard Bigbucks gives his grandchild $35,000,000. Although this bequest would be subject to the federal estate or gift tax, it results in getting the money to the grandchild without the extra round of taxes that would have been imposed had the money first been given to his son and later transferred by him to his son.

The "applicable rate" for GST purposes will be computed based on a maximum estate tax rate of 40 percent. The GST tax exemption amount, which is computed by reference to the estate tax applicable exclusion amount, for GSTs occurring in 2013 and later is $5 million (adjusted for inflation to $5.25 million in 2013).

Recent tax changes have made the estate and generation-skipping transfer taxes permanent. The taxes had previously been subject to a "sunset" provision which made their future difficult to predict, especially from a planning perspective. As a result of these recent changes, however, the estate and generation-skipping transfer taxes are no longer scheduled to sunset.