Generation Skipping Transfer Tax question?

Question

Could someone explain or point out a website that explains how this tax works in plain english. I'd like the main concepts to be explained first so that I will have an easier time understanding all the details.

The way I understand it, transfers to people younger than you are subject to the tax, even if they are not related. You are given an exemption amount, after which you are taxed the same as the estate tax. Taxable distributions and terminations are tax inclusive, and direct skips are tax exclusive. Inclusive means the tax is actually taken out of the gift itself, so the person getting the gift gets substantially less.

I also know there are a lot of details dealing with trusts, but I don't really understand them. I'm taking an online CFP class and I'm finding it difficult to read through this section and understand it.

Answer 1

I'll try to explain this as simply as possible. Basically, the overall idea of the GST tax is so the IRS can squeeze every last nickel out of large estates. Before the GST tax came into play, a typical scenario would be that Grandpa would bequest Grandson a few million dollars, and then that grandchild would pay the tax. That doesn't sound so bad on the first spin, but from the IRS viewpoint, they saw a missed opportunity. You see, if Grandpa had transferred the money to Son, then Son would pay the taxes on the transfer. When Son dies, then Grandson would get the money from Son and pay even more tax on that same money. See where this is going? Anyway, in their infinite wisdom, the IRS instated the generation skipping transfer tax, which says that a direct transfer going to a grandchild or anyone that's two generations below the person doing the transfer must pay a 55% tax on the transfer (once the estate tax exclusion of $1.5 million kicks in). Think of it as the obnoxious cousin of the AMT.

Publication 709 from the IRS gets into some of the potential landmines in this area. I don't envy you having to sort through this. I'm a CPA, and I'm immensely grateful that I've never had to deal with that whole mess.

Answer 2

Can I leave half of my estate to my grandson and half to my daughter?