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Generation Skipping Transfer Tax

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George23

Junior Member
What is the name of your state? California

My father left a GST trust for the benefit of my children and me. I'm entitled to the trust's income and my children are entitled to its principal. From what I understand, the principal goes to my children tax free, but I have to pay tax on the income. If I don't take the income and let it accumulate within the trust, does it pass tax free to my children?

Thank you in advance for your time and advice.
 


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abezon

Senior Member
No. A trust's "income" is split into principal (capital gains) & income (interest & dividends). Principal is taxed at the trust level on the trust's 1041 return. Income is passed through to the beneficiaries for tax purposes because individual beneficiaries will pay less tax on interest & dividends than a trust would. This is true even when the income is not actually distributed. The trust document can override the general rule.

If you allow the income to accumulate within the trust, you still have to pay taxes on the interest & dividends on your personal return.
 
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George23

Junior Member
So I take it that when my children take possession of the principal, they will have to pay capital gains on any appreciation? Is this correct? Also, if I use part of the principal to buy a life insurance policy on myself (the trust is the owner and beneficiary of the policy), will its payout be taxable?

Thank you again.
 
A

abezon

Senior Member
No, capital gains taxes are only due when an asset is sold. Everything you own when you die gets a new basis, so if sold soon after death, generally no gain occurs. However, should the trust sell any assets (like stocks), that will generate capital gains/losses & may require the trust to pay taxes on capital gain income.

THe insurance policy will not be taxable, but if you buy the policy & have the power to designate the beneficiary, the value of the death benefit is included in your final estate for estate death tax purposes.
 
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George23

Junior Member
So from what you are saying, when my father passed and the GST trust was created, the cost basis of the principal is the value on his DOD. When I die and my children take possession of the principal, they'll pay capital gains tax only when they sell, based upon the appreciation since my father's death. Is this correct?

If the trust holds a dividend paying stock that's reinvested, I assume I will be responsible for the income that is reinvested. And when my children inherit the principal, there will be multiple cost basises associated with the time that those dividends were reinvested. Is this correct?

Thank you.
 
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George23

Junior Member
If the yearly amount of reinvested dividends is greater than the annual exclusion for gifts, am I required to pay gift tax on the difference? And would the gift tax I pay increase the cost basis?

Thank you.
 
LdiJ

LdiJ

Senior Member
George23 said:
So from what you are saying, when my father passed and the GST trust was created, the cost basis of the principal is the value on his DOD. When I die and my children take possession of the principal, they'll pay capital gains tax only when they sell, based upon the appreciation since my father's death. Is this correct?

If the trust holds a dividend paying stock that's reinvested, I assume I will be responsible for the income that is reinvested. And when my children inherit the principal, there will be multiple cost basises associated with the time that those dividends were reinvested. Is this correct?

Thank you.
Click to expand...
That may not be correct....your kids may also get a stepped up basis depending on how the trust is structured. I would have a tax pro review the trust.

Don't get me wrong, it may be correct....but you need the opinion of someone who can read the trust documents.
 
LdiJ

LdiJ

Senior Member
George23 said:
If the yearly amount of reinvested dividends is greater than the annual exclusion for gifts, am I required to pay gift tax on the difference? And would the gift tax I pay increase the cost basis?

Thank you.
Click to expand...
Why would you feel that the reinvested dividends could be a gift? I am not following your logic there.

In any case, there would be no actual gift tax due until your lifetime gift exclusion was completely used up. At this time, that exclusion is 1 million dollars.
 
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George23

Junior Member
Why would you feel that the reinvested dividends could be a gift? I am not following your logic there.
Click to expand...
If I am the beneficiary of the trust's income, then the dividend income should rightfully go to me and be taxed on my personal return. If I let the trust reinvest the dividends, am I not gifting the trust with the income that should be taken out of the trust and given to me?

Thanks.
 
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