Tax Planning

Under IRC Sections 2505 and 2010, an individual (U.S. citizen or resident) may give up to a specified amount of gift without any federal gift tax liability. The 2017 tax act, Pub. L. No. 115-97, §11061, increased the necessary exclusion amount from $5 million basic exclusion to $10 million, effective after December 31, 2017. In addition to the basic increase to $10 million, under Section 2613 a generation-skipping transfer tax (two or more generations below the transferor) may be used by taxpayers. The generation-skipping transfer tax applies to gifts to or in trust for beneficiaries who are “skip persons” as to the transferor. A client approached you with a question about the tax consequences of setting up an irrevocable trust for his two grandchildren to attend college. Discuss the tax issues or consequences of the generation-skipping provision, and a direct gift to the grandchildren instead of creating the trust. Make at least two recommendations to support either a direct gift to the grandchildren or the creation of the trust.