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How to Calculate GST for Tax

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Learn to identify a Generation-Skipping Transfer (GST) that is subject to an additional flat-rate tax on top of any federal gift or estate tax that the donor or decedent might also owe on the transfer.

 

Things You’ll Need

  • Basic information about the relationship between the donor and the donee
  • Amount of the transfer
  • Current highest marginal estate tax rate

 

How to Calculate GST for Tax

GST for Tax

1. Identify the “skip person.” A transfer to a “skip person” is a Generation Skipping Transfer and triggers the GST tax. There are three ways in which a donee can be a skip person.

a. Lineal Descendants. Internal Revenue Code Section 2612(c) defines a skip person as a natural person which is two or more generations below the transferor. In other words, start counting generations with the Transferor (first generation); then the child of transferor (second generation/non-skip person); grandchild of transferor (third generation/skip person). The grandchild is a skip person because she is two or more generations from the transferor.

b. Trusts. I.R.C. Section 2613(a)(2) states that if all interests in such trust are held by skip persons, then the trust itself is considered to be a skip person. So if transferor creates a trust and designates all of his grandchildren as beneficiaries, then the trust itself is a skip person and the trust owes GST tax.

c. Non-lineal Descendants. A donee who is 37.5 years younger or older than the transferor is a skip person. (I.R.C. Section 2651(d) defines a generation as 25 years.)

 

2. Determine if the transfer falls into one of the three types of Generation Skip Transfers. There are three types of Generation Skip Transfers.

a. Direct Skip. I.R.C. 2612(c): A transfer to a skip person. Example: Grandpa makes a $100,000 gift to grandchild.

b. Taxable distribution. I.R.C. 2612(b). Transfer from a trust to a skip person (note this only happens when GST is no paid on the initial transfer to the trust). Example: Grandpa establishes a trust with his child and grandchild as the beneficiaries. As soon as the trust distributes money to the grandchild, a GST has occurred.

c. Taxable termination. I.R.C. 2612(a). A trust that is not a skip person (that is, a trust with multiple generations as the beneficiaries) is converted into a “skip-trust” pursuant to an event (that is, death of the non-skip beneficiaries). Thus, leaving only skip persons are the beneficiaries. Here, the entire balance of the trust is taxed. Example: Grandpa establishes trust for child’s life with the residue going to grandchild. Child dies, and the grandchild, skip person, is the only beneficiary.

 

3. If the transfer is a qualified GST, the tax liability equals the amount of the transfer times the current highest marginal estate tax rate.

 

 

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