The GST doesn’t only apply to grandchildren. It also addresses gifts or transfers made to other family members and to unrelated individuals who are at least 37-1/2 years younger than the donor. All such beneficiaries are referred to as “skip persons.”
Why ‘Skip’ and What’s a “Skip Person” ?
The child’s generation is skipped to avoid an inheritance being subject to estate taxes twice—once when it moves from the grandparents to their children, and then from those children to their children. The Internal Revenue Code (IRC) has therefore applied an additional tax to these inheritances since 1976, which was repealed and reinstated as a flat tax in 1986. It only applies to generation-skipping transfers made on or after that date. Older irrevocable trusts are grandfathered and exempt from the GST to compensate for estate taxes that might otherwise have been avoided.
Trusts Can Be ‘Skip Persons,’ Too
The GST can be levied on both direct transfers to these beneficiaries and gifts made to them through trusts. Trusts are also considered to be “skip persons” under some circumstances: All beneficiaries of the trust are skip persons to the donor or no dispositions of income or property are to be made to anyone who is not a skip person. These individuals must have “beneficial interests” in the trust, which means they have a present and immediate right to the trust’s principal and interest earned.
An Exception for Certain Descendants
IRC Section 2651(e) makes an exception for grandchildren whose parents have predeceased them. In those cases, the children effectively move up into their parents’ places in line so the GST no longer applies to them—the gift then isn’t skipping a generation.
The Generation-Skipping Tax Exemption
This exemption is an amount that can be directly transferred to grandchildren or into a generation-skipping trust for the benefit of grandchildren without incurring a federal GST. The GST shares the same lifetime exemption as the federal estate and gift taxes do, and that is pretty significant as of tax year 2022. When the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, this legislation more or less doubled the exemption to $11.18 million. (The limit is adjusted with inflation, reaching $12.06 million for 2022 and $12.92 million for 2023.) That allows grandparents to give away a lot of money and property, but it might not be permanent. The TCJA and most of its terms are set to expire at the end of 2025 unless Congress takes steps to renew it. The GST tax rate remained at 40%. Married couples can double these exemption amounts, resulting in a significant amount of cash and property that can be transferred without taxation. The average taxpayer most likely will never have to worry about these rules. Those for whom they’re a concern should speak to an estate planning attorney for guidance as to how to set up their estates for maximum protection.
How To Report GST Gifts
All direct skips in excess of the annual exclusion are to be reported on IRS Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return. They’re entered in Part II of Schedule A. If you enter them on Schedule C of Form 709 as well, they’re direct skips, and they’re tallied up over the years to be applied against the lifetime exemption. Part III of Schedule A records indirect skips. Your direct skips are subtracted from the lifetime exemption each year you do that, ultimately leaving less of the exemption to protect your estate from estate taxes at the time of your death.
State-Level GST Taxes
Many states that collect state estate taxes also collect state generation-skipping transfer taxes. Check with your state taxing authority, your accountant, or your estate planning attorney to learn the rules in your location.
