Gifting Strategies

Generation-Skipping Transfer (GST)

A generation-skipping transfer is the transfer of property, directly or in trust, to an individual who is two or more generations below the transferor.  For example, a transfer from a grandparent to a grandchild is considered a generation-skipping transfer. In this example, the transfer escapes one potential generation of estate and gift tax (e.g. the generation of the child).  Given this potential benefit, an effective transfer tax planning strategy would be to make transfers that skip as many generations as possible, as each skipped generation would escape a potential layer of estate and gift tax.  In order to discourage this type of estate planning, a generation-skipping transfer tax (GST tax) is imposed on the transfer. The GST tax is imposed at a flat rate of 45% in 2007, and is in addition to any estate and gift tax imposed on the transfer. The combined tax paid on a generation-skipping transfer is typically higher than the estate and gift tax that would be paid if the property were transferred down through each successive generation. However, each individual is allowed to make aggregate transfers of up to $2,000,000 in 2007  that are entirely exempt from the GST tax.  GST tax is generally not applied to gifts excluded by the annual gift tax exclusion or qualified transfers for medical and tuition payments.