dividual born more than 12 1/2 but not more than 37 1/2 years after the birth of the grantor is assigned to a generation different than that of the grantor. A new \leneration is assigned for each 25 year age range. A "generation-skipping trust equivalent" is treated as if it were a generation skipping trust.' A generation skipping trust equivalent is any arrangement which has substantially the same effect as a generation skipping trust even if it is not a trust. '0 Examples of generation skipping trust equivalents include life estates, estates for a fixed term, and, possibly, custodian accounts under the Uniform Gifts To Minors Act." To recapitulate up to this point (we are searching for the definition of generation skipping trust). a generation skipping trust is any trust with younger generation beneficiaries assigned to more than one generation. From the above we know what beneficiaries are and what a "younger generation beneficiary" is. The following example will illustrate a generation skipping trust and will also be the example used for discussion purposes below. Grantor transfers $300,000 to an independent trustee to hold for the benefit of Grantor's Son for his life with the remainder to Grandchild. This is a generation skipping trust because: (1) this is a trust; (2) the trust has younger generation beneficiaries (the grantor is of one generation and the beneficiaries of the trust are of another generation); and (3) the younger generation beneficiaries, namely, Son and Grandchild, are assigned to more than one generation. WHEN THE GENERATION SKIPPING TAX IS IMPOSED There are two categories of generation skipping transfers. The category which complements the estate tax provisions is called a "taxable termination" and is defined as the termination of an interest or power of any younger generation beneficiary in a generation skipping trust who is of a generation older than the generation of another beneficiary." The other category, "taxable distribution," which complements the gift tax, is similarly defined but there must be an actual distribution not out of income." Using the example above, upon the death of the Son a taxable termination will occur. This is because: (1) the trust 20/Arkansas Lawyer/January 1982
is a generation skipping trust and (2) the interest (in the income of the trust) of a younger generation beneficiary (Son) who is of a different generation than the other person who is a younger generation beneficiary (Grandchild) terminates on the death of the Son. Had Son's interest been contingent upon some event, making his interest a future interest, the termination of that future interest by his death or the event is not a "taxable termination"." A "taxable distribution" works identically as the taxable termination except that there must be an actual distribution of trust property other than income. Using the example above, if the trust principal is distributed to Grandchild upon Son's death it is a taxable distribution. If, however, upon Son's death only income is payable to Gandchild a taxable termination occurs upon the death of the Son. Only in certain circumstances will there be any practical difference between whether the generation skipping transfer is a taxable termination or a taxable distribution."
EXCEPTIONS Transfers which are already subject to federal estate or gift taxes are not subject to the generation skipping tax." For taxable distributions there is also an income exception, by which distributions of trust income are not considered taxable distributions." This exception is necessary to prevent the potential for a double tax which would occur if a distribution were subject both to the generation skipping tax and the income tax for either the trust or the beneficiary." The income exception is not available for taxable terminations, however. The most important exception is the $250,000 "grandchild exclusion", an unfortunate label in that though it is an exclusion for grandchildren it is limited to $250,000 per "deemed transferor," regardless of the number of grandchildren." Section 2612 defines "deemed transferor" as the parent of the transferee who is more closely related to the grantor than the other parent of such transferee. Ignoring some inconsisten-
10. 1 2611 (d)(1). 11. McCaffrey, Planning lor Generation Skipping Transfers, 14 Real Prop., Prob. & Trusts J. 722, 729 (1979). See also Prop. Regs. 1 26.2611-4 (b). 12. I 2613 (b)(1). 13. 12613 (a)(I). 14. Similary, if a taxable distribution occurs but the individual involved at no time had more than a future interest, then that individual
shall not be consIdered a younger generation beneficiary, 12613 (a)(1).
15. See, e.g. text accompanying 17-19 below and references cited therein. 16. §§ 2613 (a)(4) and (b)(5). 17. 12613 (a)(2). 18. McCaffrey, Planning for Generation Ski~ ping Transfers, 14 Real Prop., Prob. & Trusts J. 722, 731 (1979).
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