Quick Methods of Calculating GST

Generation-skipping tax (GST) works as a supplement to the estate tax and allows tax on assets as they pass to successive generations. The tax applies when a person bypasses children and leaves assets to grandchildren or generations further removed from the children.

2011 Rules

GST has been through several rate increases, with a sunset provision in 2010 where no generation-skipping tax is assessed to any person if the asset transfer occurred in 2010. The Tax Relief Act of 2011 allowed every taxpayer a $5 million exemption for GST. This means that GST will not assess for amounts transferred to future generations that are under the $5 million threshold.

Calculation

Calculation of GST is a flat rate of 35 percent. For every dollar over $5 million, assessment of a 35 percent tax occurs. For example, if a person leaves $8 million to grandchildren and has not used any GST exemption amounts, then the first $5 million passes without GST tax. GST tax assesses on the next $3 million at the 35 percent rate.

Portability

Changes to the amount of exemption a person qualifies for can occur under the portability section of the Tax Relief Act that occurred in 2010. If a spouse dies without using all of his $5 million exemption, then the unused portion adds to the surviving spouse exemption amount. To calculate, if a husband used $2 million of his GST exemption amount, then the wife can use the remaining $3 million, bringing her total exemption amount to $8 million. In this case, no GST tax assesses on an $8 million transfer to grandchildren.

Changes

The 2011 GST rules are on shaky ground, since they are part of the George Bush administration-era tax cuts that the Barack Obama administration continued through 2012. Unless Congress acts to continue the tax cuts in 2013, the law changes to the 2001 law, which allowed for a much lower exemption rate. If this occurs, the GST calculation will change drastically from the current simple method.

References

• Robinson Bradshaw; Estate, Gift & GST Tax Law Changes; January 2011
• Pillsbury Advisory; New Estate and Gift Tax Laws for 2011-2012; Jennifer Jordan McCall et al; 2011
• United States Senate: S.A. 4753: Summary of the Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010