The Generation-Skipping Transfer Tax
Changes in the “GSTT”
By way of explanation, the federal estate tax is designed to tax assets that are transferred from one generation to another, such as from parent to a child. The Generation Skipping Transfer Tax (“GSTT”) taxes transfers the government assumes are attempts to circumvent the government’s ability to impose a transfer tax at each generation by “skipping” a generation. An example of this “generation skipping” would be a grandparent giving or leaving money to a grandchild when the grandchild’s parent is still living. However, the tax also applies to non-family transfers. For example, it also applies to any transfer where the beneficiary is 37.5 years younger than the donor or the decedent. Lifetime gifts that qualify for the annual gift tax exclusion and gifts for educational and medical expenses are exempt from the GSTT.
2010 Tax Law Changes: In 2010 the GSTT exemption for the years 2011 and 2012 was increased to $5,000,000 and a 35% rate was imposed on amounts over $5,000,000. This 2010 tax law also provided that if no new tax legislation was enacted before 2012, the $5,000,000 exemption would revert to an indexed amount (which would have been $1,340,000 in 2010) and a 55% rate. All of the generation-skipping tax rules in the 2010 tax law were scheduled to end on January 1, 2013, unless Congress acted to extend or modify them.
2013 Tax Law Changes: On January 1, 2013, Congress passed a law that kept the 2010 transfer tax provisions intact with some rate increases. This new Act prevented steep increases in the estate, gift, and GSTT taxes that were slated to occur for individuals dying and gifts made after 2012. It did so by permanently keeping the exemption level at $5,000,000 (indexed for inflation). However, this new Act also permanently increased the top estate, gift, and generation-skipping tax rates from 35% to 40%. As a result of the inflation adjustment, the original $5,000,000 amount was increased to $5,250,000 for the 2013 tax year.
2014 Tax Law Changes: The generation-skipping tax exemption was increased to $5,340,000