Before the Tax Reform Act of 1976, taxpayers attempted to create trusts to successively skip the estates of children and grandchildren, thereby not subjecting the trust assets to federal estate taxes for several generations.
To prevent such skipping, a new tax was created in 1976 called the generation-skipping trust tax. In 1986 that tax was repealed retroactively and replaced by a similar tax called the generation-skipping transfer tax.
The generation-skipping transfer tax may not be imposed by (1) placing the property in a trust that is exempt from the generation-skipping tax or (2) causing the trust property to be taxed in the trust beneficiary’s estate for estate tax purposes, thereby obtaining the exemption from tax of the unified credit amount. The first solution is limited to the amount of the generation-skipping exemption for each donor (approximately $11,400,000 in 2019). The second solution is achieved by giving the beneficiary a general power of appointment over the trust property, that is, a right to give the trust property on the beneficiary’s death to anyone the beneficiary chooses.
Gifts to Generation-Skipping Trusts may be made during lifetime or at death.
The Generation-Skipping Trust often provides as follows:
B|O|S maintains an estate planning glossary that further defines many of the terms used in this memo. If you wish to receive a copy of the glossary, please contact your a member of your wealth management team.
Updated February 2019
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