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Generation-Skipping Transfer (GST)
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Definition
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Transfer of property by gift or at death to a person in a generation two or
more generations below the transferor. Transfer may be subject to a
generation-skipping transfer tax.
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When Does It Apply?
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Two common transfers:
Transferor places assets in trust to children for life, then to grandchildren.
Transferor gives property to grandchildren or in a trust for their benefit.
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How Does It Operate?
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Each transferor has a $1,000,000 generation-skipping transfer tax exemption
which can be used for transfers during life or death.
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Advantages/Disadvantages
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Advantages - estate taxes may be avoided by the first generation below
the transferor.
Disadvantages - generation-skipping tax, if incurred when transfers or
distributors are made to the second generation is at a 55% tax rate.
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Estate/Gift Tax Implications
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A member of the first generation may be given a lifetime income interest in the
transferred property w/o causing estate taxes.
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Income Tax Implications
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Income produced by property is taxed to the member of first generation.
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Other Considerations
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GST tax cost must be estimated when planning for liquidity needs, in addition
to any estate or gift taxes.
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