GENERATION SKIPPING TRANSFER TAX

A Generation Skipping Transfer is a transfer of property to a person who is in a generation below a child of the transferor, referred to as a "skip" person, typically a grandchild or great grandchild. There are very specific rules to determine the generation assignment of an individual where the recipient is not a lineal descendant of the transferor. In addition, a transfer to a trust may result in a generation skipping transfer if there are beneficiaries of the trust who are "skip" persons and if the trust will not be included in the estate of a non-skip person for federal estate tax purposes.

The Generation Skipping Transfer ("GST") tax is a 55% flat tax that is imposed (in addition to any applicable gift or estate tax) on any transfer of property made during a person's lifetime, or at the time of their death, to a "skip" person.

Currently, if the amount of property transferred to a skip person exceeds $1,060,000 (in 2001, the exempt amount each person is allowed to make during their lifetime or at the time of their death) the 55% tax must be considered.

Annual gifts of $10,000 or less ($20,000 for spouses who gift-split) may be excludible from this calculation. Certain other transfers may also be exempt, including tuition paid to a qualified educational institutions and payments made to a medical care provider by the transferor for the benefit of a skip person.

The $1,060,000 GST tax exemption (indexed for inflation in future years) is granted to every U.S. citizen and can be allocated to shelter smaller estates. Once the allocation of GST tax exemption is made, it is irrevocable.

The GSTT is applied to three types of generation skipping transfers:

Direct Skips - Essentially, an outright transfer that is subject to estate or gift taxes made to a "skip" person (for example, a grandchild).

Taxable Termination - This is a transfer to a "skip" person that occurs when a trust beneficiary's interest ends. For example, a taxable termination occurs when the assets of a trust, created by a grandparent, are paid to a grandchild at the death of his or her parent who had been receiving income from the trust for life.

Taxable Distributions - Any distribution from a trust to a skip person other than a taxable termination or a direct skip.

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