Congress created the generation skipping tax almost 40 years ago in 1976 and ushered in an age of increasing complexity for the tax code, always complicated and cumbersome, to fix a problem perceived at the time (and since) of avoiding taxable events by transferring assets to “several generations while avoiding the Federal Estate Tax” via use of trusts and other transfers of property rights. At the time, Congress saw how wealthy families were creating life estates in their kids, followed by a life estate in their grandkids and followed by a life estate of their great grandkids.

Life estates are not subject to federal estate tax. This meant that wealthy families who had the inclination to create these arrangements and the money to pay an attorney to do so avoided paying large amounts of taxes and smaller families and estates were paying more in taxes than wealthier ones. As such, Congress decided to tax any transfer of property or assets from an individual to another individual that is more than one generation away from the grantor, in the case of family members, or from one person to another who is at least 37 1/2 years younger than the grantor, in the case of nonfamily members. The tax applies even if the transfer is via a trust


A tax on the transfer of wealth first occurred in 1797 and continued in one form or another, with some hiatuses in between up until the present day. What was unique about the 1976 tax was that it created a special tax to specifically tax the transfer of wealth beyond one generation. Currently the generation skipping transfer tax is subject to the same $5.45 million exemption as the gift tax and both increase slightly each year due to inflation.

In addition, both the estate tax and the generation skipping transfer tax tax all transfers above the exemption at 40 percent. Unlike the gift tax, however, it is not part of the portable estate that a surviving spouse or the estate may utilize to reduce tax liability. As such, it is both similar and dissimilar to the estate tax at the same time. In addition to the lifetime exemption, there is what is called the “deceased parent rule” wherein a grandchild whose parent predeceased the grandparent to avoid paying the generation skipping transfer tax. The generation skipping transfer tax also excludes all monies used for tuition or medical expenses. Since the generation skipping tax is not portable, the the $5.45 million exemption is per grantor; however, if a married couple grants a grandchild a pricey asset, each one of the individuals are allowed to claim half of the value against their final estate.

There are further issues with who incurs tax liability. Estate and gift tax liability issues are generally easy; taxes on gifts are paid for by the donor and estate taxes are paid for by the estate itself and the recipient of neither incur any tax liability. The tax liability rules of transfers are complicated, but a general rule of thumb is that If a trust makes the transfer of asset or money, the trustee incurs tax liability, to be paid out of the corpus of the trust. If the asset or money is transferred by someone/something other than a trust, the beneficiary incurs tax liability.

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