In addition to the gift and estate tax, a generation-skipping tax applies to gifts to or for individuals, such as grandchildren, who are more than one generation younger than the donor (“Skip Persons”). Gifts that are exempt from gift tax are also exempt from generation-skipping tax.
The rate for generation-skipping tax is 40%, and it applies to non-exempt gifts and bequests that exceed a total of $5.45 million — a the same numbers as for estate tax.
The tax is imposed on the donor or his estate when an outright gift is made to a Skip Person or to a trust for the exclusive benefit of Skip Persons. The tax is imposed on a trust when it loses (by death or resignation) its last individual beneficiary who is not a Skip Person. And if it has not already been paid, the tax is imposed on a Skip Person who receives a distribution from a trust.
With attentive planning, generation-skipping tax is wholly avoidable, generally by applying the same strategies referred to in Offshore Estate Planning that serve to reduce or eliminate exposure to estate tax. And as with estate tax planning, a Model Offshore Trust is the ideal environment for applying those strategies because it provides a permanent solution.
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