The Generation-Skipping Loophole: Narrowed, But Not Closed, by the Tax Reform Act of 1976

Abstract:     
This Article discusses the loophole created by the generation-skipping transfer (“GST”) tax system, under which taxes on trusts and transfers may be avoided or delayed, a loophole which is used primarily by the wealthy. The Article examines the ways in which generation-skipping trusts and trust equivalents still provide a loophole for avoiding or delaying taxation even in light of the 1976 enactment of chapter 13 of the Internal Revenue Code. The Article first explains the requisites for imposing generation-skipping transfer taxation, and then goes on to examine those transfers exempted from taxation, the imposition of taxation, the complex dispositions on the topic, conforming transfers in trust, the procedural administrative, and effective date provisions, and the contingent beneficiary problems which have been created. The Article concludes that because chapter 13 seeks only to neutralize generation-skipping tax advantages with respect to trusts and trust equivalents, such arrangements will continue to give substantial advantage to the wealthier segments of society, and thus the exceptions to taxation under chapter 13 for generation-skipping transfers in trust should be eliminated. The Article further suggests that Congress move beyond its initial evolutionary development to equalize the effects of the transfer tax system on wealth, asserting that all generation transfers should be subject to taxation in an equitable system.

Number of Pages in PDF File: 74

Keywords: taxation, wealth, generation-skipping, tax reformed act of 1976, generation skipping transfer tax system, GST, transfers in trust, chapter 13, Internal Revenue Code, tax exemption

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