4.2 Overview

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

4.2 Overview

A flat tax equal to the maximum federal estate tax rate, presently 40%, is imposed on all generation-skipping transfers.² Every individual is allowed a limited exemption for any generation-skipping transfers, whether made during lifetime or at death.³ The exemption is in the same amount as the estate tax exclusion amount. For 2018 the exemption is $11,200,000, and it increases each year in the same amount as the estate tax exclusion. To determine when a generation-skipping transfer has occurred, consideration must be given to whether the transfer is considered to be (1) a taxable distribution, (2) a taxable termination, or (3) a direct skip. It is also helpful to define the technical terms skip person and transferor.

4.21 Skip Person

A skip person is a person assigned to a generation that is two or more generations beyond the generation of the transferor. A skip person may also be a trust, if all interests in the trust are held by skip persons.⁴

Example: A father establishes a trust for his daughter that terminates at her death and is distributed to the daughter's children. The daughter's children (transferor's grandchildren) are skip persons.

In the normal case of lineal descendants, there is no difficulty in determining the generation to which each individual is to be assigned. Parent, child, grandchild, great-grandchild is a simple enough concept, even in the tax law. As would be expected, spouses are treated as being in the same generation.⁵ Adopted individuals and relationships of half blood, such as stepchildren, are treated the same as full-blood relationships.⁶

In the case of nonlineal (unrelated) descendants, a fixed numerical rule is imposed. An individual who is within 12% years of the age of the transferor is assigned to the transferor's generation. An individual more than 12% years to 37% years younger than the transferor is assigned to the next younger generation. Generation assignments continue thereafter at 25-year intervals.⁷

4.22 Transferor

The meaning of the term transferor is rather obvious. It is the decedent when a testamentary transfer is involved and the donor when the transfer is an inter vivos gift.⁸ In the prior example, the father is the transferor.

As with the skip person, some of the finer points are more technical. The holder of a general power of appointment becomes a transferor upon the exercise or lapse of the power, including a lapse due to the holder's death. If a married couple utilizes the gift-splitting option so that a gift is treated as made one-half by each spouse, then each spouse is a transferor. That is, gift-splitting for gift tax purposes creates two transferors for generation-skipping transfer tax purposes.⁹

Also, when a qualified terminable interest property election¹⁰ is made by the executor of the transferor's estate, the estate may also elect to be treated as a transferor for generation-skipping transfer tax purposes. If the election is not made, the surviving spouse will be treated as the transferor.¹¹

4.23 Taxable Distribution

A taxable distribution is any distribution from a trust of income or principal to a skip person.¹² The...