For a U.S. taxpayer, gifts made to, and estates left to, grandchildren and great-grandchildren are subject to the Generation Skipping Transfer (GST) Tax, along with Gift Tax and/or Estate Tax. In order to answer the question of why gifts or bequests made to a grandchild need to be taxed additionally, our tax professionals have prepared a brief summary on the background of the GST tax and its purpose, which may be informative to U.S. taxpayers.
Generation Skipping Transfer (GST) Tax
The GST tax is a tax on property that a grandparent passes to his/her grandchild(ren) or great-grandchild(ren) either as a gift or a bequest through a will or trust. The GST is also applicable to property transferred to unrelated individuals who are born more than 37.5 years after the donor.
Why was GST Tax introduced?
Individuals incur gift or estate taxes when they transfer property to their children. When those children transfer property to their children, they incur estate taxes again. However, affluent individuals realized that one set of estate taxes could be avoided by directly transferring their estates to their grandchildren. Congress established the GST tax to prevent this by taxing transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger.
A GST tax is imposed even when property is left in trust for a grandchild. For example, if a grandparent sets up a trust that leaves income to his/her children for life and then the remainder to her grandchildren, the part of the trust left to the grandchildren will be subject to a GST tax.
Who must file for GST tax?
Any U.S. citizen or resident who has made a gift to his grandchildren, great grandchildren or to non-related individuals younger than him/her by 37.5 years above the qualifying threshold limit ($5,250,000 for 2013), needs to provide details of this transfer on the required Internal Revenue Service (IRS) forms.
For non-resident alien tax filers, only US-situs properties are subject to gift and estate taxes.
When is the filing due?
An individual must file the relevant form on or after January 1, but not later than April 15, of the year following the calendar year when the transfer or distribution was made.
Potential penalties and interest associated with the GST tax
• Late filing and/or payment
Penalties are assessed for both late filing and late payment (without a reasonable cause). The late-filing penalty is 5% of the net tax due for each month or part of a month that the return is late, up to a maximum of 25% of the unpaid tax. If the return is late by 60 or more days, the minimum penalty is $135 or 100% of the tax owed (the lesser of the two). If the IRS finds that the reason for late filing is due to fraud, an additional penalty of 15% is imposed, up to a maximum of 75% of the net tax due. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.
• Undervaluation of Transfer
If the IRS determines that the transfer/gift/bequest was undervalued intentionally by 65% or less than the actual value of the property and only 40% of the value was reported, resulting in an understatement of tax liability of $5,000 or more, a penalty is imposed on the underpaid tax amount.
• Interest
Interest is charged on taxes not paid by their due date, even if an extension of time to file is granted. This interest is charged on the unpaid tax amount from the first day of the due tax return until the taxes and penalties are paid.
Tax situations concerning estate transfer or gifts to skip generations can be complex, which may result in tax negligence due to unawareness. It is highly recommended to consult a tax professional regarding transfers and/or distributions given to or received from any other individual to be on the safe side.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
