Avoiding Generation-Skipping Transfer Tax Traps

Goldberg, William J.; Watson, Mark T.
October 1996
Journal of Financial Planning;Oct96, Vol. 9 Issue 5, p22
Academic Journal
The article discusses pitfalls of Generation-Skipping Transfer Tax (GSTT). There are numerous planning difficulties involving GSTT. It is one of the most complicated and difficult-to-master areas of the tax law. Two provisions of GSTT that are commonly misunderstood are the exclusion for nontaxable gifts and the predeceased ancestor exception. GSTT is imposed at a flat rate equal to the highest federal estate tax rate in existence at the time of the transfer on three types of generation-skipping transfers (GSTs): "direct skips," "taxable distributions" and "taxable terminations." A common misconception is that if a gift is nontaxable for gift tax purposes, it also is nontaxable for GSTT purposes; this is not necessarily the case. This significant tax trap can be particularly harsh in the case of an irrevocable life insurance trust. The purpose of GSTT is to ensure that a transfer tax is imposed at each generation level. Thus, a transfer to a skip person generally is subject to GSTT regardless of whether the intervening generation (a child, for example) shared the benefits of the property. Thus, in what would otherwise be a GST transfers to certain skip persons are not treated as GSTs.


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