Estate PlanningIntroductionParties Involved in Generation Skipping Transfers (1 of 5)Parties Involved in Generation Skipping Transfers (3 of 5)Parties Involved in Generation Skipping Transfers (5 of 5)Types of Taxable Transfers (1 of 3)Slide 7Slide 8Exclusions (1 of 4)Exclusions (3 of 4)Exclusions (4 of 4)Exemption (1 of 2)Slide 13Applicable Rate, Inclusion Ratio and Applicable FractionQualified DisclaimersIntroduction to Dynasty Trusts (1 of 4)Introduction to Dynasty Trusts (2 of 4)Introduction to Dynasty Trusts (3 of 4)General Drafting Issues for Dynasty Trusts© 2004 ME™ (Your Money Education Resource™)1Estate PlanningChapter 13:Generation Skipping Transfers2© 2004 ME™ (Your Money Education Resource™)2IntroductionThree systems – Estate, Gift and GSTTGSTT is an excise tax imposed on the transfer of property to a donee who is two or more generations younger than the donorOn top of estate and gift taxGSTT rate is equal to the maximum estate tax rate in effect at the time the generation-skipping transfer (GST) occurs times the “inclusion ratio”3© 2004 ME™ (Your Money Education Resource™)3Parties Involved in Generation Skipping Transfers (1 of 5)TransferorIf transferred during life and is subject to gift tax then the transferor is the donorIf transferred at death and subject to estate tax, the “transferor” is the decedentA new transferor is established whenever the property is again subject to estate tax or gift taxTransfereeNon-Skip PersonA non-skip person is any natural person or trust that is not a skip person4© 2004 ME™ (Your Money Education Resource™)4Parties Involved in Generation Skipping Transfers (3 of 5)TransfereeSkip PersonLineal Descendents Two or more generations younger than the transferor are skip personsUnrelated and Non-Lineal DescendentsIf the individuals receiving the property are not lineal descendants of the transferor, they are considered skip persons if they are more than 37½ years younger than the transferorYour generation includes anyone 12 ½ years younger and older.Individual age 60: his generation 47 ½ - 72 ½Next generation 22 ½ - 47 ½Skip generation under age 22 ½5© 2004 ME™ (Your Money Education Resource™)5Parties Involved in Generation Skipping Transfers (5 of 5)TransfereeSkip personTrust may be skip person if:All interests in the trust are held by skip persons orIf distributions can only be made to skip personsPredeceased ancestor ruleIf a child of the transferor is deceased at the time of the transfer then the deceased child’s descendents are moved up one generation.6© 2004 ME™ (Your Money Education Resource™)6Types of Taxable Transfers (1 of 3)Direct SkipOutright gift to a skip personDirect skips are taxed only once regardless of how many generations are skippedGSTT on a direct skip is imposed only on the amount received by the transfereeAny GSTT associated with a direct skip that is paid by the transferor is treated as a taxable gift by the transferorThe transferor is generally liable for the GSTT on a direct skipIf a direct skip is made from a trust, the trustee is liable7© 2004 ME™ (Your Money Education Resource™)7Types of Taxable Transfers (1 of 3)Taxable terminationA taxable termination is any termination of a trust interest unless at the termination of the trust, the trust property transferred is subject to  federal estate or gift tax,  a non-skip person receives an interest in the property transferred out of the trust, or  the distribution from the trust will never be made to a skip person.Taxable amount equals the value of the trust property transferred less any expenses, indebtedness and taxes attributed to the terminationTrustee is liable for the GSTT on a taxable termination8© 2004 ME™ (Your Money Education Resource™)8Types of Taxable Transfers (1 of 3)Taxable distributionAny distribution from a trust to a skip person that is not a taxable termination or a direct skipTaxable amount equals amount received by the recipientTransferee is liable for the GSTT on a taxable distribution9© 2004 ME™ (Your Money Education Resource™)9Exclusions (1 of 4)Qualified TransfersPayment of tuition to a qualified educational organization on behalf of a skip person is not subject to GSTTPayment of medical expenses to a medical care provider on behalf of a skip person is not subject to GSTT10© 2004 ME™ (Your Money Education Resource™)10Exclusions (3 of 4)Annual ExclusionA direct skip is a nontaxable gift for GSTT purposes to the extent the transfer is excluded from taxable gifts under the annual gift tax exclusionSplit giftsGift splitting also applies to transfers subject to GSTTEnables a spouse to treat gifts of separate property as being made 1/2 from each spouse If an individual elects to split gifts for gift tax purposes, they are automatically deemed to split gifts for GSTT purposes and vice versa.11© 2004 ME™ (Your Money Education Resource™)11Exclusions (4 of 4)Annual ExclusionTransfers to a trust deemed a skip person are only considered nontaxable gifts for GSTT purposes to the extent the transfer is equal to or less than the annual exclusion and if:The beneficiaries are given a Crummey power The trust assets can only be distributed for the benefit of the beneficiary during the beneficiary’s lifetime; and The trust does not terminate before the beneficiary’s death, and the assets must be includible in the beneficiary’s gross estate.12© 2004 ME™ (Your Money Education Resource™)12Exemption (1 of 2)GST ExemptionExemption of $5,340,000 for 2014The GSTT exemption is allocable to inter vivos transfers and testamentary transfersOnly the transferor or the transferor’s executor can allocate the GST exemption to a transfer and such allocation is irrevocableIf a direct skip occurs during the transferor’s lifetime then the transferor’s unused GST exemption is automatically allocated to the transferred property to the extent necessary to make the inclusion ratio for such property zero13© 2004 ME™ (Your Money Education Resource™)13Exemption (1 of 2)GST ExemptionThe transferor may elect outAutomatically allocated at death to the extent not actually allocated on or before the due date for the transferor’s estate tax returnFirst allocated pro rata to direct