An irrevocable trust (cannot be changed) to which generation skipping transfer (GST) tax exemption is not allocated. This trust then will be subject to GST tax if a taxable termination or distribution should occur. A common example is when trusts are structured under your will, GST exemption is allocated to protect trusts to the maximum feasible and the remaining trust assets are held in a separate trust to which no GST exemption is allocated. The reason for this is then the GST exempt trust can grow without ever having GST tax imposed on it. The remaining assets are held in a trust and typically spent down/distributed first since they do not have the same protection. A common life insurance trust (ILIT) is often not protected with the allocation of GST exemption if it only holds term life insurance. This is because less than 2% of term insurance policies are ever paid off (collected) so that in most cases it would be an inefficient or nonproductive use of the GST exemption.
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