Solving Generation-Skipping Transfer Tax Problems: Five Practical Remedies to Resolve Exemption Allocation Issues

Carol Warley, Abbie M. B. Everist, Amber Waldman, and Rachel Ruffalo (Washington National Tax) recently published, Solving Generation-Skipping Transfer Tax Problems: Five Practical Remedies to Resolve Exemption Allocation Issues, ABA Probate & Property Magazine, January/February 2023. Provided below is an Abstract:

The intricacies of estate planning often bring to light a range of complex tax considerations, including the generation-skipping transfer tax (GSTT). Understanding the implications associated with the imposition of the GSTT is crucial when reviewing an estate plan, as it can significantly affect the distribution of wealth and the preservation of family assets.

The allocation of a transferor’s generation-skipping tax (GST) exemption protects transfers from the GSTT. The inclusion ratio of a trust, calculated under IRC § 2642(a), determines the portion of the trust assets that is subject to GSTT. The 40 percent flat GSTT is imposed on three triggering events: (1) a direct skip with no remaining GST exemption available under section 2612(c), (2) a taxable distribution from a trust with an inclusion ratio other than 0.000 under section 2612(b), and (3) a taxable termination of a trust with an inclusion ratio other than 0.000 under section 2612(a).

Below, we delve into five common GST exemption allocation problems that may arise when reviewing the GST status of a trust. We then provide suggested remedies to mitigate potential unintended consequences.