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generation skipping tax

December 15, 2016 • Kareena Karnani • Log In to Post Comments

I am having some difficulty understanding the Generation Skipping Tax. When one creates a trust/estate, doesnt all the assets of the individual get put in there and at death, it will get transferred out. Suppose one of the beneficieries of the trust is a grandchild. Why is the GST needed? Does the GST have its own exemption? AFter so much researh, it just makes no sense at all. Please help!


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Don't feel bad if this seems confusing, because it is.  If we didn't have GST, wealthy families could do exactly what you describe and save family estate taxes.  If we didn't leave property to a grandchild, presumably a wealthy parent would have estate tax, distribute the remaining property to a child, who would then have an estate tax, leave it to a grandchild who would have estate tax, and so on.  So historically, wealthy families would "skip" generations by not leaving all the property from parent to child and instead pass down to the grandchild, or even the great grandchild.  To eliminate the avoidance of estate tax by skipping generations, the GST was introduced to tax such skips with additional transfer tax when the parent dies.  It does have an exemption similar to the basic applicable exclusion.  But it is enormously complicated in application.

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