Eeveryone has an exemption from this tax. In 2004, theGSTT exemption is in 2008 $2.0 million. You and your spouse together can leave up to $4 million to your grandchildren without having to pay the GSTT.

The GSTT is an extremely complicated system created to fill what was once a gap between the estate tax and the gift tax. These taxes levied tax on substantial wealth transferred between generations. This meant that the estate tax would apply to each generation. For example, Father, by will, gives Son $2 millon; at his death, the Son gives the $2 million to Grandson (his son). The tax collector would assess tax when Father transferred the money to Son and again when Son transferred the money to Grandson.

Once the Generation Skipping Transfer Tax applies, it turns $2 million of assets into “pure water.” The “water” stays pure forever. That is, if the “pure water” is in a trust in a jurisdiction, which permits a trust to have a perpetual existence, the “water” will never again be subject to an estate tax. Properly structured, with the right type of leverage, the use of the GSTT exemption can allow you to become your family’s patriarch.

How you use your GSTT exemption is extremely important. It can be used “straight up” dollar for dollar” or it can be leveraged, whereby $1 could create $10 worth of “pure water.” For instance, a $10 million insurance policy may only require the use of $ million of yourGSTT exemption.