Generation Skipping Tax

1126 WordsFeb 20, 20184 Pages
Generation Skipping Transfer Tax INTRODUCTION AND ISSUE The United States generation skipping transfer tax imposes a tax on gifts and transfers to people more than one generation younger than the donor. An example is a grandparent giving a gift to a grandchild, in turn skipping their own child. Grandparents would give a gift to their grandchildren to avoid or defer federal gift taxes, but this is now subject to a generation skipping tax. Congress passed the original generation-skipping transfer tax in 1976 to go along with the federal gift and estate tax system to make sure that the transfer of wealth from one generation to the next would have the same tax effects. The most common tax planning strategy was to pay income to one’s child for the child’s life and then distribute the trust property to his or her grandchildren at the child’s death before this legislation.1 The generation skipping tax that is applicable today became effective under Sec. 1433(a) of the 1986 Act on October 22, 1986. 1 This applies to all existing revocable trust, current wills and inter vivos transfers made after September 25, 1985. 1 The generation skipping tax was designed to keep people from a loophole in the estate tax. The grandparents would leave their estates to their children. The child would get hit with the estate taxes. The child would pass on the estate to the grandchildren who would also get hit with the estate taxes. Individuals realized that they could just leave their estates to

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