875 / What is a generation-skipping transfer (GST) on which a generation-skipping transfer tax is imposed?
A generation skipping transfer is a transfer to a person two or more generations younger than the transferor (called a “skip person,” see Q 887 regarding generation assignments), and can take any one of three forms: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip. A trust is also a skip person if the trust can benefit only persons two or more generations younger than the transferor.1 The GST tax was zero percent for one year in 2010 with a top 35 percent rate in 2011 and 2012.2 ATRA increased the maximum GST tax rate to 40 percent for tax years beginning after 2012.3
Transferor
A “transferor,” in the case of any property subject to the federal estate tax, is the decedent. In the case of any property subject to the federal gift tax, the transferor is the donor.4 Thus, to the extent that a lapse of a general power of appointment (including a right of withdrawal) is subject to gift or estate tax, the powerholder becomes the transferor with respect to such lapsed amount.5 Thus, a Crummey powerholder should not be treated as a transferor with respect to the lapse of a withdrawal power if the amount lapsing in any year is no greater than (1) $5,000, or (2) 5 percent of the assets out of which exercise of the power could be satisfied.6
If there is a generation-skipping transfer of any property and immediately after the transfer such property is held in trust, a different rule (the “multiple skip” rule) applies to subsequent transfers from that trust. In such case, the trust is treated as if the transferor (for purposes of subsequent transfers) were assigned to the first generation above the highest generation of any person having an “interest” (see below) in the trust immediately after the transfer.7 If no person holds an interest immediately after the GST, then the transferor is assigned to the first generation above the highest generation of any person in existence at the time of the GST who may subsequently hold an interest in the trust.8