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Page 4 of 18 |
What is the generation skipping transfer tax? |
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Generation Skipping Transfer (GST) Tax is scheduled for repeal in 2010 but is reinstated in its entirety in 2011. Until 2010, the exemption amount ($1,500,000 in 2004-2005) will be the same as the estate tax exemption amount in effect for that calendar year.
This tax is somewhat confusing and often misunderstood. The basic premise behind the generation skipping transfer tax - which is a tax that is separate and apart from income, estate and gift taxes - is to trap transfers of property within each successive generation. In other words, it is designed to allow transfers to spouses and children but tax transfers going to grandchildren and those deemed to be two or more generations below that of the person making the transfer. This tax is very steep - it is a flat 55% of the value of the property transferred (the rate drops from 55% to 45% in steps through 2007 where it will remain until 2010).
Those who transfer all of their property to someone who is deemed to be in the same or one generation below do not have to worry about this tax. No tax is imposed at this level.
In addition, every individual is allowed a $1.5 million generation skipping exemption in 2004 (in years thereafter, the current estate tax exemption level applies). Thus, no tax is incurred on the first $1.5 going to grandchildren and those deemed to be two or more generations below that of the transferor.
Many people escape imposition of the generation skipping transfer tax by transferring property only to those at his/her same generation or no more than one generation below - along with the allocation of the $1.5 million (in 2004) exemption.
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