GST Tax May Apply to Certain Transfers from Irrevocable Trusts

Taxpayers who created certain irrevocable trusts prior to 1985 may want to reconsider passing those assets to their grandchildren.

Last month the IRS convinced the US Tax Court to rule that these pre-1986 trusts cannot be used to pass wealth from the grandparent to grandchild without subjecting the transfer to the generation skipping transfer tax (GST tax) – which is currently a 46% tax.

This is only applicable to trusts that provide a grandparent to direct that the assets pass to the grandchildren via a general power of appointment. A general power is the power to give the property to anyone, including oneself (compare that to a limited power, which can be granted to anyone but oneself).

This US Tax Court ruling is in direct contradiction to the law in North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri, Arkansas, California, Nevada, Arizona, Idaho, Oregon, Washington, and Montana. So if you live in Wisconsin, Illinois or Indiana; you have one of these trusts; and you intend to exercise your power of appointment in favor of your grandchildren, you should review the trust with your estate planner.