Do not overlook the income tax deductions for the GST tax.

• Author: Barnett, Bernard
• Position: Generation-skipping transfer tax - Brief Article

The Tax Reform Act of 1986 (TRA) revised the method of taxing generation-skipping transfers (GSTs), which Sec. 2611(a) defines as - taxable distributions, - taxable terminations, and - direct skips.

By now every estate planner should be familiar with the provisions of that law. However, few are aware that payment of the GST tax can give rise to valuable income tax deductions - because transfers subject to the GST tax include any distribution from a trust to a "skip" person (other than a taxable termination or a direct skip) (Sec. 2612(b)). This would include not only distributions from principal but also from income. (A skip person is defined in the following Tax Clinic item, "Lapsing Crummey Powers and the GST Tax.")

Tax advisers are aware that Sec. 691(c) has long entitled a distributee who receives income in respect of a decedent (IRD) to an income tax deduction for any Federal estate tax attributable to such income. Sec. 691(c)(3) was amended in 1986 to provide a comparable income tax deduction for the portion of the GST tax imposed on a taxable termination or a...