Date: November 1992

Many people now provide gifts to their grandchildren, typically to take place on the death of the surviving grandparent. For one thing, they like giving something directly to the grandchildren, as compared with having them wait until they inherit from their own parents. Also, it is possible to structure such gifts, either outright or in trust, in a manner that will escape one generation of taxation, notwithstanding the existence of the federal Generation-Skipping Transfer Tax (“GSTT”).

If the entire estate is left to a child and then, on the child’s death, it goes to a grandchild, the estate will be subject to the regular estate tax on the death of the grandparent and again be subject to estate tax on the death of the  child. By way of example, if we trace $1 million out of a total estate of, say, $4 million, the estate tax on $1 million will be taxed at the rate of 55%, or $550,000, leaving only $450,000 for the child. Then, on the child’s death, that $450,000 would be taxed again at 55%, or $247,500, leaving only $202,500 for the grandchild. But, if the $1 million is left by the grandparent directly to the grandchild, without being taxed in the estate of the child, the additional $247,500 estate tax is saved.

If you plan to transfer wealth to successive generations, you need to be aware of the GSTT and to consider its impact on your overall estate plan. The GSTT can be particularly severe because, if applicable, it is imposed at a flat rate of 55% of the value of the transfer and is levied in addition to the regular federal estate tax, otherwise applicable.

Congress’ primary purpose in imposing this tax appears to have been to prevent the transfer of wealth free of tax, through successive generations. As noted, if a grandparent can make a gift to a grandchild without incurring the GSTT, the gift would escape tax-ation at the generational level of the grandchild’s parent. The GSTT is designed to ensure that such a gift will be taxed at both the grandparent’s and the grand-child’s parent’s level; however, very favorable exemptions from the GSTT are available.

The GSTT is applicable to transfers of property to a person more than one generation below the giver of the gift (the “transfer-or”), whether made during the transferor’s lifetime or at his or her death. The most common example of such a transfer is a gift directly from a grandparent to a grandchild. However, the GSTT is also applicable when a gift is made to a trust which benefits a person more than one generation below the transferor.

 It is important to note that it is not necessary for the beneficiary to be related by blood or adoption to the transferor in order for there to be a generation-skipping transfer. If the beneficiary is married to the transferor, then there is no generation skipping, irrespective of age. In general, beneficiaries other than lineal descendants of the transferor’s grandparents, whether by blood or adoption, are considered to be more than one “generation” below the transferor if they are more than 37.5 years younger than the transferor. A beneficiary who is less than 121/2 years younger than the transferor is considered to be in the same generation.

Although the GSTT can be a harsh tax, proper estate planning can often soften the impact; and in many cases, the tax can be avoided altogether. To that end, there is a $1 million exemption available to each transferor; and with careful planning, this can be expanded to $2 million for a married couple, even though the generation-skipping transfer doesn’t occur until the second death. The impact of the GSTT can also be reduced by use of the annual $10,000 gift tax exclusion (which, in most circumstances, is not

Subject to the GSTT), and by payments made directly to an educational institution for tuition or to the provider of medical services to the beneficiary (which are excluded from the tax). Additionally, often life insurance can be used in conjunction with an irrevocable life insurance trust to greatly leverage the use of the $1 million exemption for GSTT purposes.

If you would like further information about utilizing the GSTT exemption to make gifts to grandchildren, or to discuss your overall estate planning needs, please call an attorney in our Trusts and Estates Department at (310) 858-7700.

Our Trusts and Estates Department offers a wide range of estate planning and probate services, geared toward providing an orderly transfer of wealth from one generation to another. We prepare wills, trusts and related documentation while furnishing sophisticated estate tax planning. We also provide counsel to executors and trustees on the administration of estates and trusts, and offer skilled representation in probate, trust and conservatorship proceedings and disputes.

Rosenfeld, Meyer & Susman was founded in 1957.  The firm's area of expertise include: Trusts and Estates, Litigation, Taxation, Corporate and Securities, Entertainment, Family Law, Labor and Employment Law, Insurance Coverage and Defense, Real Estate, and Employee Benefits.  

  Return to top