Overview of Generation-Skipping Transfer Tax

By Michael S. Whalen and Edmond R. Davis

Reproduced from commentary in Lawgic's California Wills & Trusts

Generation-Skipping Transfer Tax

A generation-skipping transfer tax is imposed by Chapter 13 of the I.R.C. The term "GST exemption" refers to the exemption provided in I.R.C. §2631(a). The generation-skipping transfer tax, generally speaking, is designed so that a transfer tax is assessed on each transfer of wealth from one generation to the next generation. The transfer of wealth to the next generation is covered by the estate tax and the gift tax. If a transfer is made to a person who is two or more generations younger than the transferor, then there is an avoidance of the concept of taxing transfers at each generation. Thus, the generation-skipping transfer tax is imposed. One exception to this concept is the exemption amount that is available to each transferor (presently $1,010,000). If this exemption is allocated to a GST-exempt trust then no distributions (including final distributions) from that trust will be subject to the generation-skipping transfer tax.

Reverse QTIP Election

The purpose for making a reverse QTIP election, and then allocating the generation-skipping tax exemption to the reverse QTIP property under I.R.C. §2631, is to take advantage of the full $1,010,000 GST election in the estate of the first spouse to die. The other portion of the GST election is generally allocated to the trust sheltered by the unified credit amount (I.R.C. §2010), which for 1999 is equal to $650,000. Upon the death of the surviving spouse, under normal equitable proration rules, the reverse QTIP property would be liable for estate taxes attributable to it, under I.R.C. §2207A. The Treasury Regulations provide that, if the estate tax attributable to the reverse QTIP election property is not collected from that trust, this will not constitute a constructive addition to the reverse QTIP trust (Reg. §2652-1(a)(6) Examples 7 and 8). As can be seen, the result of this is to not deplete the reverse QTIP trust by the amount of estate taxes attributable to it. The estate taxes attributable to the reverse QTIP trust, of course, must be paid and an appropriate estate tax clause must be included. Often, in an estate tax clause, the estate taxes attributable to the reverse QTIP trust are chargeable against the remaining QTIP trust or trusts.