Frequently Asked Questions about
Estate Planning, Wills, Trusts, and Probate

• What is the “generation-skipping tax?”

Another tax affects certain transfers made to grandchildren and other persons who are substantially younger than the person making a gift or bequest. Congress enacted the federal “generation-skipping transfer” (GST) tax in order to tax people who would otherwise use long-term trusts to avoid paying estate taxes at each generation. GST taxes are not only imposed on trusts, however, and you need not be a Rockefeller or a Gates to worry about the GST tax. Being in the middle class in Northern Virginia will do just fine.

Each individual dying in 2008 has a $2 million GSTT exemption, so you can leave up to that amount to grandchildren and others who would otherwise be subject to GST taxes without paying that tax. (Under the 2001 Economic Growth and Tax Relief Reconciliation Act, the amount of the exemption will rise to $3.5 million in 2009, with a sweeping change in the gift tax and GST system planned for 2010.) Unfortunately, the rules pertaining to GST taxes are extremely complex and convoluted, so that many trusts might be subject to GST taxes unnecessarily if the trust is not prepared and administered with the GST tax in mind.

Unlike the estate tax, which is graduated, the GST tax is levied at a flat 45% tax rate for persons dying in 2008, imposed on the balance remaining in a generation-skipping gift after any estate tax is paid. In addition, the GST tax applies at each generation, so that a transfer to a great-grandchild could be taxed three times (an estate tax plus two GST taxes). If you are rich enough to be making large generation-skipping gifts, good actuarial, accounting, and legal advice is a must.

“Blessed be the hand that prepares a pleasure for a child, for there is no saying when and where it may bloom forth.”  –Douglas William Jerrold