The IRS recently ruled that a trust should receive grandfathered generation-skipping transfer (GST) tax treatment even though it was established and funded after October 26, 1986. With a few exceptions, all generation-skipping transfers made after that date are subject to the GST tax. 

In this case, the decedent and lifetime beneficiary of the trust in question was a woman who, when she reached majority in 1928, was judged incompetent and remained under guardianship her entire adult life. In June 1986, her guardian sought to establish the revocable trust. After the ward’s death, the trust would pay $100,000 to her unrelated companion, and the rest of the remainder would go to her nieces and nephews or to their heirs by intestacy. The trust was approved in December, 1986 and funded on December 31.

The IRS pointed out that the creation of this trust did not alter the decedent’s prior plan for the disposition of her estate, other than the $100,000 bequest to the unrelated companion. Since the trust merely reflected the decedent’s already existing intentions, any transfers from it will be exempt from GST taxes regardless of its being established and funded after October 26, 1986.