Question

Based on the guidance contained in the textbook and IRC, a gift occurs when the transfer of property is complete and the gift is valued at the date of the transfer. Imagine a scenario in which a client creates an irrevocable trust for his two (2) grandchildren to attend college. Discuss the tax issues or consequences of the generation skipping provision, and a direct gift to the grandchildren instead of creating the trust. Make at least two (2) recommendations as to how the client could minimize the tax consequences of the gift.

Answer 1

GST (generation-skipping tax) is incurred when grandparents directly transfer their assets to their grandchildren without leaving it to their parents. An exemption refers to the figure/amount which one can directly transfer to their grandchildren or towards generation-skipping trust for the advantage of their grandchildren without the need to incur GST and further, it shares the lifetime exemption like in the case of federal estate etc.

Gift givers can set up a special trust like a Crummey trust allowing the receiving individual to withdraw the gift assets for a limited time. So, the gift is considered to be a present interest and eligible for the gift tax exclusion. There is a further option of using a 529 College Savings Plan is like a retirement plan for education with the advantage that the money grows free of federal income tax. and should be be used for qualified higher-education expenses. Also there is the option of Delaware dynasty trust to secure assets to benefit several generations.