Generation Skipping Transfer Taxes
In part, the federal estate tax is designed to prevent wealth from accumulating within one family indefinitely. The idea is that as property passes down from succeeding generations in a family, the government will take a percentage of the property at each generation. People often avoid this tax with proper estate planning.
One way to prevent this tax is by arranging for the inheritance to skip generations within a family. Instead of leaving property to their children, wealthy people can leave it to their grandchildren and even great-grandchildren. However, Congress reacted to this approach and created a tax on these generation-skipping transfers as Wealth Management discusses in “GST Tax Exemptions in Jeopardy.”
Yet, Congress left open an exemption from these taxes for generation-skipping transfers from irrevocable trusts that were created before September 25, 1986. This exemption created other estate planning issues. If an old exempt trust is modified, it is not always clear whether it continues to be the same trust or whether it should be viewed as a new trust and subjected to the transfer tax. The answer, in most cases, depends on how the IRS decides to rule.
If you have an old, exempt trust or are the beneficiary or trustee of one, then it is extremely important that you meet with an estate planning attorney as soon as you begin to consider modifying the trust in any way. That will allow you to receive the best advice about what you should and should not consider doing.
Reference: Wealth Management (May 18, 2018) “GST Tax Exemptions in Jeopardy.”