Tax Issues

Generation-Skipping Transfer Tax

Typically a taxable event occurs when a grandfather passes away leaving money to his son. Then the son later passes away leaving money to his son (the grandchild). Upon each death the federal government will be looking for inheritance tax due on all amounts above $1,500,000. If an attempt is made to circumvent the government's effort to tax each generation by leaving assets to a grandchild rather than one's child, the IRS has certain rules about how much money can skip a generation and then what additional taxes are due. For example, if a grandfather, in order to avoid these tiered levels of taxation, were to give his estate not to his son but to his grandson, a whole generation would be skipped and the IRS would lose the ability to tax that generational level.

The IRS code allows for a $1.5 million exemption per transfer on direct skips. A direct skip is a transfer of an interest in property to a person of a generation two or more below the generation of the transferor (the grandfather). A gift of property to a person's grandchild is an example of a direct skip. However, a transfer to a grandchild is not treated as a direct skip if the parent of the child is deceased.