• The Gst Trust Tax Trap
  • August 17, 2018 | Authors: Joseph R. Marconi; Brian C. Langs
  • Law Firm: Johnson & Bell, Ltd. - Chicago Office
  • The issues faced by trust and estate lawyers sometimes include complex tax analysis. One of those issues arises when an irrevocable trust skips a generation with trust assets going directly to grandchildren. That event may trigger a tax that is known as the federal generation-skipping transfer (GST) tax. The GST tax can be partially avoided by a carefully devised estate plan. If not avoided, it must be identified at the time such tax is triggered, which in some cases occurs at the time of the death of the initial, first generation trust beneficiary. This article will attempt to assist lawyers in identifying scenarios where the GST tax may come into play so as to avoid or properly identify this menacing tax on generational wealth transfers.


    Before the initial 1976 implementation of the GST tax in the internal revenue code, well-to-do individuals and their well-paid estate planners had found a loophole in the code that allowed them to pass their wealth to future generations without estate taxes by using life estate vehicles. Since life estates were not subject to federal estate tax, one could create a life estate for their children, followed by a life estate for their grandchildren, and so on through the generations, which allowed them to transfer tremendous wealth to their subsequent generations tax-free. To combat their perceived abuse of the code, Congress implemented the GST tax in 1976. However, Congress retroactively repealed the 1976 version in favor of a newer version of the GST tax in the Tax Reform Act of 1986. The 1986 version of the GST tax remains in place, but GST exemptions and allocations have been adjusted for inflation periodically.1


    The federal GST tax was designed to work together with the federal estate tax and federal gift tax to ensure taxes are paid on the transfer of wealth to each generation. While the estate tax imposes tax on the transfer of assets at death, the gift tax ensures that the estate tax cannot be avoided through lifetime giving. In turn, the GST tax ensures that taxpayers cannot avoid the estate and