GSTT Calculation
The Generation-Skipping Transfer Tax (GSTT) equals the top estate tax rate times the applicable asset value times an inclusion ratio. Under EGTRRA 2001, the GSTT was repealed in 2010 and reinstated in 2011.
Inclusion Ratio and Applicable Fraction
The inclusion ratio is used to determine the actual tax rate. The inclusion ratio times the top rate produces the actual GSTT rate. The inclusion ratio is defined as one minus the applicable fraction. Sec. 2642.
The applicable fraction is a formula designed to reflect the property that will be taxed under the GSTT rules. It includes the GSTT exemption, the property value, the estate tax paid and the charitable deduction. In effect, it is used to reduce the total value of assets subject to tax. The applicable fraction formula is:
GSTT exemption
property value - charitable deduction - estate taxes
Sec. 2642(a)(2).
Example 1.4.3A Charitable Remainder Unitrust
For example, assume that a testator who passes away in 2024 (when the GSTT and estate tax exemption was $13.61 million) created a charitable remainder trust for the life of a grandchild. The trust was funded with $16.61 million in assets and the charitable deduction is determined to be $3 million.
The applicable fraction is:
GSTT exemption
property value - charitable deduction - estate taxes
This equals ($13.61 million / ($16.61 million - $3 million - 0)), or one. Thus, the inclusion ratio is (1-1) or zero. For a remainder unitrust, if the exemption is equal to or greater than the noncharitable transfer, the inclusion ratio is zero and all the trust distributions to grandchildren are exempt from GSTT.
