Wills, Trusts, and Estates

Week 11
Spring 2015

Generation-Skipping Transfers
Tax, in addition to any gift or estate taxes,
on the transfer of property to special
transferees called skip persons.

Skip Persons
Lineal Descendent

Non-Lineal Descendent

2 or more generations
younger than Transferor

Any person not a lineal

descendent, not the spouse
of Transferor, but is more
than 371/2 years younger
than Transferor

Ex. Grandparent
(Transferor) Parent
(Non-Skip) Grandchild
(Skip Person GST)

Ex. Transferor age 70

Friend (Non-Lineal, Skipped
Person) age 30

Non-Skip Persons
Any person not a Skip Person
Lineal descendents less than 2 generation
below Transferor
Non-Lineal descendents and unrelated
parties that are at most 371/2 years
younger than Transferor
Transferors spouse
Gifts to trusts etc are determined by the
age of the beneficiaries

Example
Grandfather John is survived by his wife,
Sue. John and Sue had 2 children Ann
and Ben. Ann is married and has three
children Jen, Julia, and Jan.
Who will be considered skip persons?
Jen, Julia, and Jan are skip persons. Sue,
Ann and Ben are non-skip persons

Types of Taxable Transfers

Direct skips
Taxable distributions
Taxable terminations

Direct Skips
Outright transfer to a grandchild or a trust
that is a skip person during life or at death.
Transferor is liable for GSTT imposed on
value received by Transferee

Direct Skip Example

James left a fully furnished condo that he had
owned for 12 years to his grandson, Scott, under
the terms of his will.
Will this transfer be considered a direct skip
thereby triggering the GSTT if Scotts father
(James son) is still alive?
Yes, only if Scotts father is alive. If Scotts
parent had predeceased James then no GSTT
would apply to this direct skip bequest. In either
event, the regular federal estate tax applies to
this transfer.

Predeceased Parent Exception

Example

Grannys will left her extensive estate in equal shares to her children. All 3
of her children survived her, but 1 child named Paul died 65 days after
Granny. Grannys will had a survivorship clause of 60 days. Paul was
survive by 2 children.

What will Paul take under Grannys will and will he have to pay GSTT?
Paul will take a 1/3 interest in Grannys estate and no GSTT has to be paid.

What if Paul died within 55 days of Granny (within the required survivorship
time period)?
No GST will have been deemed to have occurred and no GSTT has to be
paid by Grannys estate (transferor).

Taxable Termination
Where a trust is terminated and the trust
property is transferred to a skip person.
Ex. Trust income to Ann for life, then remainder of the
trust is to be paid to Anns grandchild John

Taxable amount is (=) the value of the trust

property transferred minus (-) any expenses,
indebtedness and other taxes attributed to
terminating the trust
Trustee pays the GSTT

Taxable Termination Example

Roses will directed that the income from her
marketable securities was to pass to her
daughter, Kim, for life, with the remainder
interest to pass at Kims death to Roses
granddaughter, Daisy. When Kim died, her life
interest in the property terminated and Daisy
received the underlying property.
Has a taxable termination occurred?
Yes, upon Kims death Daisy is a skip
beneficiary.

Taxable Distribution
Any distribution from a trust to a skip
person that is not a taxable termination or
a direct skip.
Ex. Trust income to Ann for life, but half of the
trusts principal is to be paid to Anns
grandchild John if John graduates from high
school

Transferee is liable for GSTTif trustee

pays the GSTT then the trustee has made
a gift to the transferee

Taxable Distribution Example

Ethan created an irrevocable trust 10 years ago
for the benefit of his son, Carl, and grandson,
John. In December of this year, the trustee
made a distribution of $20,000 of trust income to
Carl and $18,000 of trust income to John.
Was a GST made to John?
Yes, the GSTT is triggered and John
(transferee/beneficiary) would be liable for any
GSTT.

GSTT Exclusions
Annual exclusion of $14,000
Split gifts

Qualified Transfers
Direct payment of qualified medical expenses
or educational expenses on behalf of a Skip
Person

GSTT Exemptions
GST lifetime exemption is $5.43M applies to
transfers made during life or at death
Exemption can be doubled because spouse also has
an exemption

Transferor can choose when to use their GSTT

credit
GSTT Tax Rate = flat 40% on transfers in excess
of $5.43M

Calculation of the GSTT

GSTT = GSTT rate X Inclusion ratio
Inclusion ratio = 1 (TE (VT (ET +CD)))
TE = transferors exemption allocated to the
transfer if nothing has ever been given $5.M
VT = value of the transferred property
ET = amount of federal estate tax or state death
tax recovered from the trust attributable to the
transferred property
CD = charitable deduction attributable to the
transferred property

Filling Requirements
Inter vivos direct skips Form 709
Direct skips at death Schedule R or R-1 of Form 706
Taxable distributions Forms 706-GS(D-1) and 706GS(D) filed by trustee who makes a taxable distribution
Receiver of taxable distribution must file 706-GS(D)
Taxable termination Form 706-GS(T) by trustee