It wasn’t supposed to work this way. A decades-old tax was created by the federal government with the intent of keeping the wealthy from using trusts to pass their fortunes on to future generations without facing estate taxes.
Instead, state law changes in recent years allowing trusts to live in perpetuity are now undermining the federal law’s intent—and it is occurring against a backdrop of an election year and public anger about inequality.
The generation-skipping transfer tax is imposed on gifts and bequests to transferees who are two or more generations younger than the transferor, such as grandchildren. The 40 percent GST tax applies once an exemption amount is surpassed; for 2016, the amount is $5.45 million.
When structured correctly, a $2 million gift to a trust where a $2 million GST exemption is applied simultaneously could grow to more than $250 million by the time it gets to the parent’s great-great grandchildren, according to Robert Adler, an attorney at Adler & Adler PLLC.
Adler said that accumulated value in the trust would only be about $50 million had the GST exemption not been allocated and the tax been imposed
States Sidestepping Congress on Taxing Family Wealth | Bloomberg BNA