Understanding Estate Taxes
12. Generation skipping transfer tax
Here is another benefit of a QTIP Trust. If some or all of your estate "skips" the living parent and goes directly to a grandchild, there could be another tax called the Generation Skipping Transfer Tax. This is a VERY expensive tax. It is equal to the highest federal estate tax rate in effect at the time-currently 45%. And it is in addition to estate taxes.
The good news is that everyone has an exemption from this tax. In 2008, the GSTT exemption is equal to $2 million. So you and your spouse together can leave up to $4 million to your grandchildren without having to pay the GST tax. But, here again, you have to plan ahead so you don't waste one exemption.
Dividing the estate in half-as you just saw with the QTIP-is a good way to preserve both GSTT exemptions. For example, if Bob and Sue's combined estate is $4 million, they could divide it so they each own $2 million. Then, when Bob dies, his estate can use his $2 million GSTT exemption. And when Sue dies, her estate can use hers.