Final answer:
The generation-skipping tax typically does not apply to many taxpayers due to the unified credit, which protects a considerable amount of wealth from being taxed, particularly for estates below the exemption threshold set forth in tax regulations.
Step-by-step explanation:
The generation-skipping tax does not apply to many taxpayers primarily because of the unified credit, which allows for a significant amount of wealth to be transferred without incurring the tax. The generation-skipping tax is meant to impose taxes on transfers of wealth that skip a generation, as in a grandparent leaving an inheritance directly to a grandchild, potentially avoiding the estate tax that would typically be paid if the wealth was transferred to the parent first. However, the tax only impacts larger estates due to the high exemption threshold. For instance, in 2013, estates valued at more than $5.25 million were subject to the estate tax, affecting only a tiny percentage of those with high levels of wealth. The annual exclusion, marital deduction, and step-up in basis can also be relevant in why the generation-skipping tax may not apply, but the unified credit directly shields a substantial amount of wealth from this tax.
The generation-skipping tax does NOT apply to many taxpayers due to the annual exclusion, the marital deduction, and the unified credit. The annual exclusion allows a taxpayer to give a certain amount of money or property to someone each year without incurring gift or estate tax. The marital deduction allows an individual to transfer an unlimited amount of assets to their spouse, either during their lifetime or after death, without incurring estate or gift tax. Lastly, the unified credit provides a certain amount of exemption from estate or gift tax that can be used to offset tax liability.