Understanding Estate Taxes
13. Generation skipping transfer tax
If some or all of your estate "skips" the living parent and goes directly to a grandchild, there could be another tax called the Generation Skipping Transfer Tax.
This is a VERY expensive tax. It is in addition to the estate tax and is equal to the highest federal estate tax rate in effect at the time. In 2011 and 2012, the GST tax is 35% because that is the estate tax rate.
Everyone also has an exemption equal to $5 million per person. So, if you are married, you and your spouse together could leave up to $10 million directly to your grandchildren without having to pay the GST tax.
But in 2013, if Congress does not act, the exemption will be $1 million per person. So you and your spouse will only be able to leave $2 million directly to your grandchildren without having to pay the GST tax...which will be 55%.
Dividing the estate in half -- as you just saw with the QTIP and the trust with tax planning -- is a good way to preserve both GSTT exemptions.