Generation-Skipping Transfer Tax
The federal generation skipping transfer (GST) tax is imposed on substantial wealth transferred between generations. The GST tax is an extremely complicated system meant to fill what was once a gap between the federal estate tax and the federal gift tax.
If the normal order of things were followed, the estate tax would apply to each successive generation. For example, Father, by will, gives Son $2,000,000; at his death, the Son gives the $2,000,000 to Grandson (his son). The tax collector would assess tax when Father transferred the money to Son, and again when Son transferred the money to Grandson.)
Before the enactment of the GST tax, extremely wealthy individuals (usually those having a net worth of several million dollars) would sometime set up a bequest like this: During his lifetime, or in his will, Richard Bigbucks gives his grandchild $10,000,000. Although this bequest would be subject to the federal estate or gift tax, Richard has managed to get the money to the grandchild without the extra round of taxes that would have been collected had the money first been given to his son, Farnsworth, and then transferred by him to his son (don't cry for Farnsworth too much; he undoubtedly was provided for by way of other transfers!).
Under the GST, you can give up to $2 million in 2006 through 2008 to your grandchildren (in total, not to each) without triggering the tax. Anything above that would be subject to the GST.
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