Accredited Wealth Management Advisor Practice Exam

What factor makes a transfer to a trust for children's benefit subject to generation-skipping transfer tax?

1. It is considered a direct skip.

2. The children have no income interest in the trust.

3. It is classified as an indirect skip upon termination.

4. It can be revoked under certain conditions.

The correct answer is: It is classified as an indirect skip upon termination.

The concept of a transfer to a trust for the benefit of children being subject to generation-skipping transfer (GST) tax hinges on the classification of the transfer. When a transfer is considered an indirect skip, it means that the trust is established for the children, and upon their subsequent death or the termination of the trust, the assets will pass to grandchildren or individuals in a lower generation. This creates a potential GST tax liability because the transfer effectively skips a generation in terms of the standard line of taxation that would apply to a direct transfer to the children. In estate planning, a direct skip refers to a transfer that goes directly to a skip person, meaning someone who is two or more generations below the transferor. In this case, the trust for children's benefit does not constitute a direct skip because the children are the primary beneficiaries, not skip persons. The inability of the children to have an income interest in the trust doesn't inherently create GST implications, as GST tax is concerned with the generational aspect of the transfer rather than the income rights of the beneficiaries. Whether or not the trust can be revoked under certain conditions is also not significant in categorizing the transfer as an indirect skip. Revocability relates more to the control over the trust than the gener