Legal Definitions - taxable gift

A taxable termination is a specific event that triggers a tax liability within a special type of trust called a generation-skipping trust. This event occurs when a beneficiary's interest in the trust ends, and as a result, the trust's assets become available for distribution to beneficiaries who are two or more generations younger than the person who created the trust (known as "skip persons"), with no intermediate generation beneficiaries ("nonskip persons") retaining an interest.

To be more precise, a taxable termination happens when all three of the following conditions are met:

• An interest in a generation-skipping trust property officially ends (for example, when a beneficiary dies or reaches a certain age).
• After this termination, no beneficiary who is considered a "nonskip person" (typically a child of the trust creator, or someone in the same generation) holds any interest in the trust.
• At this point, distributions from the trust may be made to a "skip person" (typically a grandchild of the trust creator, or someone two or more generations younger).

This rule is designed to ensure that wealth transferred across multiple generations through a trust is subject to transfer taxes at certain points, preventing indefinite deferral of these taxes.

Examples of a Taxable Termination:

• Example 1: Grandparent's Trust for Child and Grandchildren

  A wealthy grandparent establishes a trust that provides income to their daughter (a nonskip person) for her entire life. The trust document specifies that upon the daughter's death, the remaining trust assets are to be held for the benefit of the grandparent's grandchildren (who are skip persons). When the daughter passes away, her interest in the trust terminates. At this point, no nonskip person holds an interest in the trust, and the assets are now available for the grandchildren. This event constitutes a taxable termination, triggering a generation-skipping transfer tax.

• Example 2: Trust with an Age-Based Termination

  A trust is created by an individual, stipulating that their nephew (a nonskip person relative to the grantor) will receive all income from the trust until the nephew reaches the age of 45. Once the nephew turns 45, his interest in the income ends, and the trust principal is then to be distributed outright to the nephew's children (who are skip persons relative to the grantor). When the nephew celebrates his 45th birthday, his interest terminates. Since no other nonskip person has an interest, and the assets are now distributable to his children, this event is a taxable termination.

• Example 3: Joint Beneficiary Trust

  A trust is set up to provide income jointly to two siblings (both nonskip persons relative to the grantor) for as long as either of them lives. The trust document states that after the death of the last surviving sibling, the trust's assets will be distributed to their collective nieces and nephews (who are skip persons relative to the grantor). When the second sibling dies, the interest of both nonskip persons in the trust terminates. With no nonskip person remaining and the assets now available for the nieces and nephews, this event is classified as a taxable termination.