Question: What is the Generation Skipping Tax?
Answer: Imagine you have a $10 million portfolio you want to leave to your heirs. Ordinarily, you would pass the cash onto your children, at which point the government would assess an estate tax. Years later, when your children died, they would pass the assets onto their children (your grandchildren), incurring an additional estate tax. Uncle Sam got two bites at your golden apple.
The wealthy, the ingenious folk they are, decided to simply pass on assets directly to the grandchildren, thereby skipping an entire generation of estate tax. Brilliant! Unfortunately, Congress caught onto this and in 1986 created the Generation Skipping Tax that is charged in addition to the estate tax. It would be possible, for example, for a $100 million estate left to a grandchild to be whittled down to just over $20 million after the double-whammy of estate tax and the generation skipping tax.
The generation skipping tax is gradually phased out in perfect lockstep with the estate tax repeal up through 2010. In 2011, however, the law sunsets and the GST returns to the pre-Bush levels.
