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Paying For College: Understanding the Tax on Gifts (page 3)

By — John Wiley & Sons, Inc.
Updated on Oct 26, 2010

Figuring Out The Generation-Skipping Transfer Tax (GSTT)

The Generation-Skipping Transfer Tax (GSTT) is yet another transfer tax (like the gift tax) that Congress devised to close a particular tax loophole: one generation (the grandparents, for example) bypassing their children in favor of their grandchildren when making a gift. That makes sense, but to Congress, it meant that they could only collect gift tax once on the value of that property, rather than twice — grandparents to parents, and then parents to children. The GSTT was instituted to deal with that problem.

The GSTT is, essentially, a tax calculated by figuring out how much the government would have collected had the transferred amounts gone first to your children, and then transferred subsequently to your children's children, and so on.

The GSTT is designed for the very wealthy; accordingly, you are entitled to a lifetime exclusion of transfers from this tax (over and above annual exclusion amounts, which are the same for the GSTT as they are for the gift tax), totaling $2,000,000 per donor in 2008 and indexed annually for inflation.

Because of the high GSTT exemption amount and the availability of annual exclusion gifts, for most of you, the GSTT will remain very far out on the radar. If, however, you're one of those grandparents who has undertaken to provide college education for your grandchildren (and you have more than a few of them), and if you've also decided to take advantage of various college savings plans that are now available, you may run up against this tax. If you plan to make large gifts into these plans (or into trust or any other financial vehicle), you need to contact your legal and tax advisors.

You should never ignore tax advice, but, in this case, missteps in the GSTT can cost you especially dearly — the top tax rate in 2003 was 45 percent in 2007. Because the GSTT is assessed in addition to any gift tax you may have to pay, the combined gift tax and GSTT on a gift to your grandchild can approach almost 100 percent of the total gift!

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