Taxation of Estates and Gifts
A generation-skipping transfer, where one gives to his grandchild, is subject to a GST tax. 26 U.S.C. § 2601.
A GST is a taxable distribution, taxable termination, or direct skip.
There are three types of taxed GSTs:
GSTs are always taxed at 40%. 26 U.S.C. § 2641; 26 U.S.C. § 2001(c).
GST taxes are paid out of the property constituting the GST unless explicitly stated otherwise. 26 U.S.C. § 2603(b).
- It has to specifically say GST. Even saying "all taxes" is not enough to rebut the presumption.
- If a GST is a taxable distribution, the GST tax is paid by the transferee, presumably out of the distribution. 26 U.S.C. § 2603(a)(1).
If you only know the amount including taxes with direct skips, divide the amount by 1.4 to find the after-tax amount given, and multiply that by .4 to find the amount of the GST tax.
- Direct skips are more efficient because you don't have to pay GST taxes on the GST taxes, only on what the transferee receives. 26 U.S.C. § 2623. Taxable terminations and taxable distributions do have to pay GST taxes on the GST taxes. 26 U.S.C. § 2621; 26 U.S.C. § 2622.
- For taxable distributions or taxable terminations with the taxes paid out of another source, multiply the amount given by two-thirds to get the tax amount. (.4 ÷ .6)
Gift tax has to be paid on GST tax amounts.
- Gift tax does not have to be paid on gift tax amounts. So don't keep adding it up forever, just once.