1977, April, Pg. 637. Estate and Trust Forum.

6 Colo.Law. 637

Colorado Lawyer

1977.

1977, April, Pg. 637.

Estate and Trust Forum

637Vol. 6, No. 4, Pg. 637Estate and Trust ForumThe Generation-Skipping Tax

The Tax Reform Act of 1976: Generation Skipping Transfers (§ 2006 of the Act and §§ 2601, 2602, 2603, 2611, 2612, 2613, 2614, 2621 and 2622 of the Internal Revenue Code).Prior LawUnder the law prior to the Tax Reform Act of 1976 (the "Act"), the termination of an interest of a beneficiary in a trust, life estate, or similar arrangement (e.g., an estate for years)(fn1) did not result in the imposition of an estate or gift tax, unless the beneficiary under the trust had a general power of appointment with respect to the trust property. Accordingly, under prior law, no estate or gift tax was payable in respect of the transfer of assets from one life tenant to another or from a life tenant to the remainderman and assets could be transferred from generation to generation without tax, subject only to the applicable rule against perpetuities. Believing that such trusts were used most often by the wealthy,(fn2) Congress added a new chapter to the Internal Revenue Code designed to tax property passing from one generation to successive generations in trust form as if such property had been transferred outright from one generation to successive generations (subject to a $250,000 exclusion for transfers to grandchildren, described below).

Changes In GeneralThe Act imposes a new tax, at the unified estate and gift tax rate, in the case of "generation skipping transfers" upon the distribution, prior to termination of the trust, of trust corpus to a generation skipping heir (e.g., a grandchild of the grantor) or upon the termination of an intervening interest in the trust, whether or not on termination of the trust (e.g., upon the death of a child of the grantor holding a lifetime income interest, the remainder passing to the grandchildren of the grantor).

A generation-skipping trust is a trust having two or more generations of "beneficiaries" who belong to generations which are younger than the generation of the grantor of the trust. A person is a "beneficiary" if he has either a present or future "interest" or "power" in the trust. An interest includes a right to receive

638income or corpus from the trusty during the duration of the trust, or the right to receive a distribution upon its termination. For example, if a trust provided that income was to be paid for life to the grantor's child, then to the grantor's grandchild, with the corpus to be distributed to the great grandchildren, then the child, grandchild and great grandchildren would all be beneficiaries under the trust (because all three generations would have a present or future right to receive income or corpus) and the trust would be a generation-skipping trust (because there are two or more generations of younger beneficiaries). During the life of the child, only the child would have a present interest in the trust.

In contrast, a trust which provided that the income was to be paid for life to the grantor's spouse, with remainder to the grantor's grandchild, would not be a generation-skipping trust because there would not be two or more generations of beneficiaries that were younger than the grantor. If the income was to be paid for life to the grantor's spouse, with remainder to the grantor's issue by representation who survived the spouse and during the spouse's life there were children and grandchildren of the grantor living, the trust would be a generation-skipping trust. However, no generation-skipping transfer would result on the death of the spouse, and, in addition, distributions to the grandchildren during the spouse's life would not be treated as taxable distributions if the children did not have a present interest or power in the trust.(fn3)

The generation-skipping tax is computed as if there had been outright transfers (by gift or in an estate) by successive generations. Thus, when a trust is created with income to the grantor's child with the remainder to the grantor's grandchildren, at the death of the child the trust corpus will be subject to tax as if added to the child's taxable estate and taxed at the child's marginal tax...

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