Date: 06/08/99

Primary author: Scott Beane, CPA

 

Question:

What is the most common trust trap?
 

Answer:

Failure to include Generation Skipping Tax (GST) provisions. The following is an explanation of the 55% GST, which is over and above the estate tax rate.

In general, Generation skipping tax (GST) provisions are necessary to avoid a flat 55% tax on amounts transferred at a future date to grandchildren. GST is a highly complex issue wherein document language and executor elections combine to create serious tax consequences. Overall, the key is to maximize the utilization of a $1,030,000 exemption in a manner to avoid an inclusion ratio trap. Even assuming the most astute executor makes all the right elections, failure to divide trusts into GST and non-GST proportions may likely cause a Trust to only be partially GST exempt. For example, a Trust which is 80% GST exempt and 20% non-exempt, will cause an additional 55% tax on 20% of each distribution to a grandchild. A Trust which has such a problem and accumulates over 20 years can result in significant tax consequences. By simply dividing the Trust into two parts, one 100% GST exempt and the other 100% GST taxable, the trustee can select which Trust to disperse funds from thereby avoiding the tax completely or controlling the timing of the tax if all beneficiaries are grandchildren.

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