Revitalizing the Generation-Skipping Transfer Tax

27 Pages Posted: 10 Sep 2021 Last revised: 23 May 2022

See all articles by Daniel J. Hemel

Daniel J. Hemel

New York University School of Law

Robert Lord

Americans for Tax Fairness

Date Written: September 9, 2021

Abstract

Congress first enacted the generation-skipping transfer (GST) tax in 1976 to protect the estate and gift tax base and to ensure that extraordinary fortunes would bear their fair share of the transfer tax burden. Nearly a half-century into the life of the GST tax, those goals remain unrealized. In recent decades, high-net-worth individuals have succeeded in shifting hundreds of billions of dollars to “dynasty trusts” that—under current law—are poised to escape federal wealth transfer taxation indefinitely. The rise of dynasty trusts reduces the revenue-raising potential of the estate and gift taxes and allows a privileged class to exert vast economic and political power based solely on an accident of birth.

This white paper presents a legislative reform agenda designed to reinvigorate the GST tax, stem the rise of dynasty trusts, and bring hundreds of billions of dollars back within the federal transfer tax base. We highlight three flaws in current law that account for the GST tax’s failure: (1) very high exemption amounts; (2) loopholes that allow high-net-worth taxpayers to stuff GST-exempt trusts with assets worth many multiples of the exemption amount; and (3) the lack of any durational limit on dynasty trusts in states that have abolished the rule against perpetuities. Our three-part reform agenda addresses each of these flaws. First, we propose a reduction in the GST exemption from the current level ($11.7 million) to the 2009 level ($3.5 million). A $3.5 million GST exemption still would be higher, in inflation-adjusted terms, than the exemption amount advocated by the Reagan administration. Second, we propose a set of common-sense loophole closers that would prevent high-net-worth taxpayers from stuffing GST-exempt trusts with assets worth far more than the exemption amount. Third, we propose to limit the maximum duration of a trust’s GST exemption to two generations, with an exception that would allow tax-free distributions to beneficiaries who were alive at the time of the trust’s inception. Our plan would shore up the estate and gift tax base and stem the rise of dynasty trusts while allowing more than 99 percent of American families to pass wealth across multiple generations tax-free.

Keywords: generation-skipping transfer tax, dynasty trusts, estate tax, wealth transfer taxation

JEL Classification: K34

Suggested Citation

Hemel, Daniel J. and Lord, Robert, Revitalizing the Generation-Skipping Transfer Tax (September 9, 2021). U of Chicago, Public Law Working Paper No. 790, Available at SSRN: https://ssrn.com/abstract=3920038 or http://dx.doi.org/10.2139/ssrn.3920038

Daniel J. Hemel (Contact Author)

New York University School of Law ( email )

Robert Lord

Americans for Tax Fairness ( email )

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