November 2003

Generation-Skipping Transfer Tax Rules for Assets in Trust

By Stuart A. Rosenblatt

The generation-skipping transfer (GST) tax is a concern for many large estates. If there is sufficient wealth for a grandparent to amply provide for children and grandchildren, it is important to maximize, through planning, what will be passed to successive generations. A grandparent’s concern is that her children may not wholly share her wishes and act in a manner adverse to the grandchildren’s interests. Transferring all estate assets to the first generation and trusting that they will be well managed and, in turn, generously transferred to the second could prove imprudent. Family assets in properly established trusts can avert this problem. Individuals can receive only what the trust terms permit them to have.

An estate tax and a GST tax may both be required to be paid on assets held in trust for more than one generation. Although the GST tax can be paid at the same time as the estate tax, it can also be postponed until a taxable distribution or termination occurs. Postponing the payment of a GST tax keeps a larger base of assets working to make income for the family, but it may be years before an event occurs. The trust’s growth could cause the GST tax to multiply to many times over what it would have been if paid initially. Some planning must be done to determine when the GST might best be declared and how trust documents should be drafted to allow or require this at the right time.

The structuring of a trust should allow for offsetting variances in the estate and GST taxes that might be achieved when a trust beneficiary in an intervening generation dies. An estate tax might be increased and a GST tax reduced advantageously, or the GST tax increased and the estate tax reduced advantageously. The trust could include a power of appointment in the trustee or the beneficiary that would ensure that the lowest tax is paid.

The Exhibit illustrates the consequences of using powers of appointment in a trust that is intended to stay in existence for at least one generation.

Stuart A. Rosenblatt, JD, CPA, is the senior tax partner at Wiss & Company, LLP.

Robert L. Ecker, JD, CPA
Ecker Loehr Ecker & Ecker LLP

Stuart A. Rosenblatt, CPA,
Wiss & Company LLP

Contributing Editors:
Peter Brizard, CPA

Jeffrey S. Gold, CPA
J.H. Cohn LLP
Ellen G. Gordon, CPA
Margolin Winer & Evens LLP

Jerome Landau, CPA

Harriet B. Salupsky, CPA

Debra M. Simon, MST, CPA

Richard H. Sonet, JD, CPA
Marks Paneth & Shron, LLP

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