Photo by Jordan Donaldson | @jordi.d on Unsplash

Question:

I’m going to make a gift to my daughter (over the current Federal annual gift tax exclusion amount). Is this considered a direct gift or a direct skip when I report the gift on my gift tax return? I believe that it’s just a direct gift, that would be entered in part 1 on Schedule A of the gift tax return. Is there any instance where a gift to a daughter or son would be reported as a direct skip on the gift tax return (part 2 of Schedule A)?

Response:

No, it’s a direct gift. It would only be a skip if you made the gift to a grandchild or unrelated individuals who are 37½ years younger than you.

While these days only very few people need to be concerned about the federal estate or gift taxes, even fewer need worry about the generation-skipping tax. As you know, gifts of less than $17,000 (in 2023) per individual giver and recipient need not be reported. Gifts in excess of that amount should be reported on a gift tax return filed with your income tax return on Form 709. Such excess gifts use up part of the amount you can give away tax free. In 2023, that amount is just under $13 million at $12,920,000, though it is slated to be cut in half for people dying in 2026 or later. Still, even at the lower threshold, very few estates will be subject to the estate tax or affected by making taxable gifts. If, for instance, you gave $117,000 to your daughter, you would use up $100,000 of your estate tax exemption, still permitting you to give away $12,820,000 tax free through your estate (or $6,360,000 beginning in 2026). Couple can double these thresholds.

But you were asking about the generation-skipping tax. In order to limit wealthy families from sheltering large estates from taxation at the second generation, Congress enacted the generation-skipping tax. The practice of many families had been to leave their estates in trusts to which their children could benefit but which would not be taxed when their children died. The generation-skipping tax limits the amount that can be protected in this way to the same $12,920,000 threshold, imposing a tax on amounts above this that skip a generation. A generation for this purpose is defined as grandchild or an unrelated individual more than 37½ years younger than the decedent. Gifts to such individuals (known as “skip” persons) also use up some of this threshold and must be reported on gift tax returns. This is even less likely to affect taxpayers than the federal estate and gift tax reporting requirements.

Related Articles

How Do I Fill Out Gift Tax Return for Adjustment in Loan Interest? What are the Downsides of Dissolving Our Generation-Skipping Trust? How Must I Document a Gift to My Daughter?