Terms:

Skip person:
A person who is two or more generations younger than the transferor. See I.R.C. § 2613.

Overview

The GST tax is a separate tax imposed on transfers to :

(1) grandchildren more than two generations below the grantors or;

(2) non-related persons who are more than 37 ½ years younger than the grantor.

This tax is imposed at the highest marginal rate of gift and estate tax (49% in 2003). See I.R.C. §§ 2601, 2613. There is a lifetime exemption of $1,120,000 (for 2003, but indexed for inflation) against transfers subject to the GST tax. See Rev. Proc. 2002-70.

The purpose of the GST tax is to prevent people from avoiding estate tax by transferring assets to their grandchildren instead of their children, and thus avoiding the double tax liability that would have occurred had there been two transfers instead of one (one from parent to child and a second from child to grandchild). To circumvent this strategy, the government simply adds the GST tax to the regular estate tax so that the government will get their double taxation in any case.

Exclusions

Just as with the gift tax, annual exclusion gifts and direct payments for educational and/or medical expenses are not subject to the GST tax. However, special provisions are required to qualify gifts in trust for the GST annual exclusion. See I.R.C. § 2642(c)(2).

A complete discussion of the intricacies of the GST tax is beyond the scope of this course.