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Generation Skipping Dynasty Trust

Although the Generation Skipping Tax (GST) is a transfer tax, it should not be confused with the terms normally associated with estate tax.

In fact, transfers to "skip" persons (usually grandchildren) can be subjected to both an estate tax and a generation skipping tax.

It was well stated by an observant writer.  "At the core of the estate tax is the government's presumption that it should get about half your money when you pass it along to your children.  On the theory that it should get another chance to cut the family wealth in half when your children die, it has calculated that when you make bequests directly to your grandchildren, it should grab 75% of the money for good measure."

The GST is really the government's objection to taxpayers skipping over a generation when making direct (or indirect) transfers.  This is so not because of its concern for skipped persons but because of its concern for lost revenue.  In any event, there is a $1,000,000 GST exemption (adjusted for inflation since 2001).  In general terms, that means that each transferor may exempt an adjusted $1,000,000 value – or $2,000,000 (plus adjustments for inflation) for a married couple - when transferring wealth to skip persons (i.e., second generation persons).

A GST Trust is designed to essentially maximize the application of each spouse's GST exemption, when making transfers to skip persons, primarily through a method referred to as the "reverse QTIP election".  The primary goal with GST planning is to apply as much of the GST exemption as possible of both spouses when considering all transfers to second generation children (whether they be direct transfers or taxable termination transfers).

The GST Trust format is quite complex and should be used only when the intent is for a large estate to utilize generation skipping transfers.  Because of the limited value of the GST exemption, only a portion of any large estate should be considered for parceling out generation skip transfers.

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