Transfer Tax Implications of Life Insurance and GSTT

To help look after future generations, you might elect to transfer property and your life insurance policies – by gift or at death – to a beneficiary two more generations below yourself in age. As a rule, this means to your grandchildren and great-grandchildren, and the practice is also referred to as “skip-persons’ gift. The goal is to have your assets pass from a grandparent to the “skip-person” without being adding to the taxed portion of a child’s estate.

Typically, the transferor places assets in a trust to children for life, then to grandchildren. Or the transferor could give the property to grandchildren or place it in a trust for their benefit.

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Life insurance policies transferred to skip-persons such as grandchildren and great-grandchildren are also subject to the U.S. Generation-skipping transfer tax (GSTT). The GSTT imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated humans more than 37 and a half years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren or great-grandchildren.

– How does the federal estate tax work? 

– What is the generation skipping tax exemption for 2015?

The IRS has a copy of the GSTT tax return form (Form 709) on their website.

The GSTT can be expensive because it is applied in addition to federal estate or gift taxes. Also, life insurance could involve the payment of policy proceeds on the life of a relative who named a younger relative as beneficiary. The GSTT could be applied as a gift to the younger relative while the older relative is still alive. However, if the younger relative’s parents are deceased when the transfer occurs, the child could avoid having to pay the GSTT.

“When dealing with estate tax, generation skipping taxes and other forms of estate tax planning, the professional should remember that the statute of limitations often works when the discovery of the mistake was made rather when the work was done,” said Gary B. Sutherland, CEO, CIC, North American Professional Liability Insurance Agency (NAPLIA).

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