Question

Giovanni established an irrevocable life insurance trust in 2014 and funded it with a $1 million face value policy on his life. After his death, income of the trust is distributed at the discretion of the corporate trustee to Giovanni's wife and children. The trust is to terminate 25 years after Giovanni's death, when trust assets are to be distributed to Giovanni's grandchildren. Which one of the following is a correct statement about the application of the generation-skipping transfer tax (GSTT) to this trust?

a) The GSTT will not be applicable to this trust since it violates the rule against perpetuities.
b) The GSTT will never apply to this trust because Giovanni did not assign any of his GSTT exemption.
c) The GSTT cannot apply to this trust since no skip parties were in existence when it was established.
d) The GSTT will apply when a taxable termination occurs.

Answer 1

The generation-skipping transfer tax (GSTT) applies to Giovanni's trust when a taxable termination occurs, which would be when the trust assets are distributed to Giovanni's grandchildren.

Step-by-step explanation:

The correct statement about the application of the generation-skipping transfer tax (GSTT) to Giovanni's irrevocable life insurance trust is d) The GSTT will apply when a taxable termination occurs. This happens when there is a distribution to a skip person, who is at least two generations below the transferor (in this case, Giovanni's grandchildren). The GSTT is a separate tax from the estate tax and is designed to prevent individuals from avoiding estate and gift taxes through transfers to individuals more than one generation away. The GSTT exemption amount is a tax benefit offered to each individual and needs to be assigned intentionally; it is not inherently applied to trusts without specific assignment.

The correct statement about the application of the generation-skipping transfer tax (GSTT) to this trust is option d) The GSTT will apply when a taxable termination occurs.