Preserving and Transferring Wealth: Generation-Skipping Transfers

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Chapter 8
Generation-Skipping Transfers
What's Allowed, and What's Not

What Are Generation-Skipping Transfers?

Preserving and Transferring Wealth focuses on protecting the value of your assets.

To get an overview of estate planning, see our Estate Planning Guide for tips on wills, recordkeeping, probate and more.

Tax planners have often suggested the use of trusts and other devices to pass property down through several generations with no estate tax burden. For example, a father at his death would create a trust entitling his son to receive the income from the trust during his life, and upon the son’s death, the property would pass under the terms of the trust to the grandchildren. The obvious advantage of such a plan was in providing the economic benefit of the property to one generation without incurring any transfer tax upon passage to the next. The son would enjoy the income from the property without incurring any estate tax upon his death since he had no right to the property itself.

The Tax Reform Act of 1976 imposed a new tax and new tax return requirement on such an arrangement. This Act was repealed and replaced by legislation in the Tax Reform Act of 1986. The generation-skipping transfer (GST) tax is imposed on every generation-skipping transfer either in trust or through direct distributions. The GST tax does not apply to lifetime annual exclusion gifts to individuals and to certain trusts or to certain transfers for medical or educational purposes. The rules regarding this tax are extremely complex and should be reviewed with your tax adviser.

Are There Exemptions to the Generation-Skipping Tax?

Important exemptions to the GST tax should be used in an effective estate plan. Every individual is allowed a GST tax exemption of $1,010,000, which may be allocated to any property transferred during lifetime or at death. A married couple may transfer $2,020,000 without incurring a GST tax. For example, if you transfer $1.5 million to your grandchildren, $1,010,000 would be exempt from the GST tax. The $1,010,000 GST lifetime exclusion will be adjusted periodically for inflation. There was an additional exemption of $2 million per grandchild for certain transfers made before 1990.

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Disclaimer: This guide is not intended to be a substitute for specific individual tax, legal, or investment planning advice, as certain of the described considerations will not be the same for every taxpayer or investor. Accordingly, where specific advice is necessary or appropriate, consultation with a competent professional adviser is strongly recommended.