How to avoid being stung by the GST tax
Leaving lots of money to grandchildren, and skipping the generation in between, used to be a nifty way to beat the federal estate tax. That way, the money was subject to estate tax just once, when the grandparent left it to the grandchild. Otherwise, it would have been taxed when the grandparent left it to his child, and then again if that child preserved the money to pass along to his own children (the grandkids).
Eventually Uncle Sam realized he was being deprived of his second bite of the estate tax apple. And in 1986, the generation skipping transfer tax, or GST tax, was created. It makes sure the IRS gets that second bite after all.
“The IRS, as well as the various ancillary government agencies have unlimited resources and as such, have done all they could to ensure they are entitled to payment of as much of your hard-earned assets as possible, during and after your life. Most people work their entire lives to provide for their loved ones and leave a legacy for them after they have gone, however, without a proper tax and estate plan all of those efforts may be in vain.”