Still another tax can affect transfers you make to your grandchildren, or to other people who are substantially younger than the person making a gift or bequest. Congress originally enacted the federal “generation-skipping transfer” (GST) tax in order to tax people who would otherwise use long-term trusts to avoid paying estate taxes at each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 Buffett to worry about the GST tax. Being in the middle class and living in Northern Virginia will do just fine.
For persons making gifts – or dying and leaving money to heirs – in 2012, there is a relatively large lifetime exemption from the GST tax compared to earlier years – $5,120,000 per person. However, on January 1, 2013, the exemption is scheduled to fall to only about 1.4 million (technically, $1 million adjusted upwards for inflation during the period 2001-2013) and the rates will be essentially confiscatory. 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 35% tax rate for persons dying in 2012, imposed on the balance remaining in a generation-skipping gift after the estate tax (also 35%) is paid. In 2013, the GST tax rate shoots up to a whopping 55%. 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, then 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