What is the Generation Skipping Transfer Tax?

The GST tax is a tax in addition to the estate tax and imposed on transfers to grandchildren and more remote descendants (i.e. “skip persons”). 

There are three types of transfers that can trigger GST tax:

1. Direct Skip. A “direct skip” is a transfer of an interest in property to a skip person.

2. Taxable Termination. The term “taxable termination” means the termination (by death, lapse of time, release of power, or otherwise) of an interest in property held in a trust unless—

(A) immediately after such termination, a non-skip person has an interest in such property, or

(B) at no time after such termination may a distribution (including distributions on termination) be made from such trust to a skip person.

3. Taxable Distribution. The term “taxable distribution” means any distribution from a trust to a skip person (other than a taxable termination or a direct skip).

However, these transfers are exempt from the GST tax if the transferor’s GST tax exemption is allocated to the gifts.  The allocation of a decedent’s GST tax exemption should be reported on Schedule R of the estate tax return.  It is also possible for GST exemption to be allocated automatically to certain trusts (see IRC §2632(4)).

If distributions are made from trusts to skip persons, consider whether any GST exemption has been previously allocated to the trust and whether the distribution is subject to GST tax.  For example, if the decedent was the beneficiary of a trust established by the decedent’s parents (the “grantors”), the decedent’s death could trigger a termination of the trust and distribution of the remaining assets to the decedent’s children (the grandchildren of the grantors).  If the grantors had not allocated GST exemption to the trust when it was funded, and if it is not allocated any of the decedent’s GST exemption, the distribution may be subject to GST tax.  It is very important to arrange for the payment of GST tax before trust assets are distributed.