Overview

Main Menu Name: Gen. Skip

Provides the simplified GSTT (Generation-Skipping Transfer Tax) calculation that is applied to the gross transfer of any property when the tax is paid from other property (Direct Skip Transfers). IRC Section 2602 states that the amount of GSTT imposed is equal to the taxable amount multiplied by the applicable rate. The applicable rate and the inclusion ratio, as defined under IRC Chapter 13, will also be calculated.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

GSTT, the Generation Skipping Transfer Tax, is a flat tax at the highest estate tax rate that is imposed in addition to any applicable gift or estate tax on any transfer of property made during a person's lifetime or at the time of their death to a done considered a "skip" person, typically a grandchild or great grandchild. Whenever significant amounts of property are distributed to a beneficiary who is two or more generations younger than the transferor, the amount distributed may be subject to the GSTT.

Currently, if the amount of property transferred to a grandchild exceeds the GST exemption (the exempt amount each person is allowed to make during their lifetime or at the time of their death), the GST tax must be considered.

Gifts of less than the gift tax annual exclusion ($17,000 beginning in 2023, or $34,000 for spouses who gift-split) may be excludible from this calculation. Certain other transfers may also be exempt. These include:

• Tuition paid to an educational institution that meets the IRS income tax eligibility guidelines for deductible contributions.
  
  
• Payments made to a medical care provider by the transferor for such care.

The GSTT exemption (indexed for inflation in future years) is granted to every US citizen and can be used to shelter smaller estates. Once the exemption is allocated, it is irrevocable.

The GSTT is applied to three types of generation skipping transfers:

1. Direct Skips: Essentially, an outright transfer that is subject to estate or gift taxes made to a grandchild.
   
   
2. Taxable Termination: This is a transfer to a grandchild that occurs when and because a trust beneficiary's interest ends. For example, a taxable termination occurs when the assets of a trust, created by a grandparent, are paid to a grandchild at the death of her parent who had been receiving income from the trust for life.
   
   
3. Taxable Distributions: In essence any distribution other than a Direct Skip or a Taxable Termination made to a grandchild.

This calculation provides a simplified GSTT (Generation-Skipping Transfer Tax) calculation that will be applied to the transfer of any property where the tax is paid from other property (Direct Skip Transfers).

The GSTT rate is the maximum estate tax rate, which was 55% through 2001, 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, 45% for 2007 through 2009, and 35% for 2011 and 2012, and 40% after 2012.

The GST exemption was $1,000,000 and indexed for inflation between 1997 and 2003 ($1,010,000 in 1999, $1,030,000 in 2000, $1,060,000 in 2001, $1,100,000 for 2002, and $1,120,000 in 2003). Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the exemption was $1,500,000 in 2004 and 2005, $2,000,000 in 2007 through 2008, and $3,500,000 in 2009. Under the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, GST transfers in 2010 had an inclusion ration of zero. The GST exemption is the same as the estate tax exclusion amount after 2010.

Getting Started

GSTT is a flat tax at the highest estate tax rate that is imposed on any transfer of property made during a person's lifetime or at the time of their death to a donee considered a "skip" person. When the property is distributed to a beneficiary who is two or more generations younger than the transferor (or a "skip" person), the amount distributed may be subject to the GSTT. Currently, if the amount of property transferred to a "skip" person exceeds the GST exemption (the amount each person is allowed to make during their lifetime or at the time of their death), the GST tax must be considered. Annual exclusion gifts ($17,000 in 2023, or $34,000 for spouses who gift-split) may be excluded for GSTT purposes. Other "qualified transfers" may also be made annually. A "qualified transfer" includes:

• Tuition paid to an educational institution that meets the IRS income tax deductible contribution eligibility guidelines.
  
  
• Payments made to a medical care provider by the transferor for such care.

Both of these types of "qualified transfers" are not subject to any dollar amount limitations as long as they meet the IRC 2503(e) criteria. The GSTT exemption is granted to every US citizen and can be used to shelter smaller estates. Once the exemption is made, it is irrevocable.

The GSTT is applied to three types of generation skipping transfers:

• Direct Skips- Any transfer that is subject to any estate (see IRC Chapter 11) or gift (see IRC Chapter 12) taxes made to a skip person.
  
  
• Taxable Termination- Any termination of an interest of any beneficiary in a trust unless: a) a non-skip person has an interest in the property, or b) no distribution can be made from the trust to a skip person after the termination.
  
  
• Taxable Distributions- Any distribution other than a Direct Skip or a Taxable Termination made to a skip person.

The simplified GSTT calculation is determined by an "exclusion ratio" of: the Total Value of the gift divided by the Amount of exemption. This "exclusion ratio" can lower the effective tax rate.

The GSTT rate is the maximum estate tax rate, which is 55% through 2001, 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, 45% for 2007 through 2009, 35% for 2011 and 2012, and 40% after 2012.

The GST exemption was $1,000,000 and indexed for inflation between 1997 and 2003 ($1,010,000 in 1999, $1,030,000 in 2000, $1,060,000 in 2001, $1,100,000 for 2002, and $1,120,000 in 2003). Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the exemption was $1,500,000 in 2004 and 2005, $2,000,000 in 2007 through 2008, and $3,500,000 in 2009. Under the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, GST transfers in 2010 had an inclusion ration of zero. The GST exemption is the same as the estate tax exclusion amount after 2010. For the year 2011, the unified credit exclusion amount is $5,000,000, and the tax rate is 35%, for both gift tax and estate tax purpose. The $5,000,000 exclusion amount is indexed for inflation after 2011.

Future years (2024 and later) are estimates based on the Inflation Rate for Exclusion input.

Entering Data

1. Year:  Enter the year of the calculation. The Exemption Allocated to Transfer is monitored by the year, as the maximum allowed amounts vary on a yearly basis.
2. Value of Property Transferred:  Enter the before tax value of the property being transferred. (The gross value.)
3. Amount of Annual Exclusion Allowable for GSTT (if any):  Enter the amount of annual exclusion (can be up to $14,000/year beginning in 2013 or $28,000/year for spouses who gift-split).
4. Exemption Allocated to Transfer:  Enter the amount of the individual GST exemption that you want applied to the transfer. You may allocate any portion of the GST exemption to the property being transferred. This allocation, once made, is irrevocable and should be used efficiently. When you change the year input, the exemption amount will be filled in automatically. If a computer icon appears next to this input, click it to have the software calculate the exemption amount.
5. State and Federal Tax Paid Out of Property Transferred:  Enter the total dollar amount of taxes paid out of the property transferred to the beneficiary, if not already deducted for gift tax purposes.
6. Gift or Estate Tax Charitable Deductions Allowed:  Enter the dollar amount of any charitable deductions allowed for the property being transferred.
7. Inflation Rate for Exclusion:  Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.

Results

The program shows the net amount of the property transferred after figuring in the applicable annual exclusion. The applicable fraction, which always equals 1 if the amount of GST exemption is equal to the value of the property transferred, is also given. The applicable fraction equals some number between 0 and 1 if the value of the property involved in the transfer is greater than the amount of GST exemption allowed (and applicable GSTT annual exclusions).

The calculation also shows the Applicable Rate and the Inclusion Ratio, which equals 1 minus the applicable fraction, and then these two ratios are used to calculate the applicable rate which is the maximum federal estate tax rate (currently this rate is 35% multiplied by the inclusion ratio). The Direct Skip GSTT is given based on the calculation of the "taxable amount" multiplied by the applicable rate. This amount is the amount of a transfer that is subject to GSTT when the GSTT is paid from other property.

The Direct Skip GSTT is given based on the calculation of the "taxable amount" multiplied by the applicable rate. This amount is the amount of a transfer that is subject to the GSTT when the GSTT is paid from other property.