Now, in addition to both the gift tax and the estate tax, there is what we call the “generation-skipping transfer” tax, or GST tax. The GST tax is an additional tax that is applied in a case of any transfer either during the lifetime of the transferor, or at the death of the transferor to any individual who is more than one generation below the transferor. The GST tax, again as I mentioned a moment ago, applies whether the transfer is made during the life or at the transferor’s death.
GST Exemption Amount
Now, there is an additional GST exemption which is also equal to the amount of the estate tax applicable exclusion. So, in addition to the estate and gift tax exclusions there is an additional exemption of GST which is $5,120,000.00 for 2012. So, these three taxes combined, the gift tax, the estate tax and the GST tax are sometimes referred to collectively as “transfer taxes.” The computations are such that basically what we are trying to get at is a single tax that is paid on all three types of transfers, although that tax may be paid at various moments during the lifetime of the transferor or at the transferor’s death.
Changes to GST Tax
Let’s talk about the GST tax. Under EGTRRA, the estate tax was repealed for 2010. But also, the GST tax was repealed for 2010. Under the 2010 Tax Relief Act, the GST tax was retroactively reinstated effective for GST transfers occurring after December 31, 2009, with a $5 million exemption. This is not surprising because the GST exemption is statutorily tied to the estate tax exclusion. However, in an interesting twist, for 2010, the applicable rate for GST transfers was set at zero percent. Now, the applicable rate is not the same thing as the tax rate, okay.
Applicable GST Rate
For those of you who may do a lot of GST tax work, you probably know that the applicable rate is basically the product of the maximum federal estate tax rate, as well as the inclusion ratio with respect to the transfer. I won’t get into all of the details of that. But let me just say to those of you who may work in this area, that the IRS interprets that zero percent as being a zero percent tax rate, not a zero percent inclusion ratio.
Changes in GST Tax Rate
The effect for 2010 is that any generation-skipping transfers were effectively taxed at a zero percent rate. So, there was no GST tax for 2010. For 2011 and following, however, the GST exemption amount is $5 million. Again, with the inflation adjustment for 2012, it’s $5,120,000.00. You will also see that the rate for the GST tax is 35 percent.