Another tax affects certain transfers made to grandchildren and other persons who are substantially younger than the person making a gift or bequest. Congress enacted the "generation-skipping transfer" (GST) tax in order to prevent wealthy people from using long-term trusts to avoid paying estate taxes at each generation. However, generation-skipping transfer (GST) taxes are not only imposed on trusts, and you need not be a Rockefeller or a Kennedy to worry about the GST tax.
Each individual has a $1 million GST exemption, so you can leave up to $1 million to grandchildren and others who would otherwise be subject to GST taxes. Unfortunately, the rules pertaining to GST taxes are extremely complex and convoluted, so that many trusts could be subjected to GST taxes unnecessarily, if the trust was not prepared or administered with the GST tax in mind.
Unlike the estate tax, which is graduated, the GST tax is a flat 55% tax, imposed on the balance remaining after any estate tax is paid. In addition, the GST tax applies at each generation, so that a transfer to a great-grandchild could be taxed three times (an estate tax plus two GST taxes).
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