Gift and Estate Tax Basic Exclusion Amount vs. Generation-Skipping Transfer Tax Exemption Amount

Perry made a $12,060,000 taxable gift to his son Ross on 1/1/2022 and a taxable gift of $12,060,000 to Ross's daughter Marilyn on April 30, 2022. Perry made no gifts or generation-skipping transfers before 2022. Note the following:

The Basic Exclusion Amount (BEA) in 2022 is $12,060,000,
The GST Exemption is the same dollar amount as the BEA by statute,
The transfer tax on a taxable transfer of $12,060,000 is $4,769,800 (2022, as indexed) before any credits, exclusions or exemptions, and
The gift tax, the estate tax, and the generation-skipping transfer tax are collectively referred to as "transfer taxes."

How much, if any, must Perry pay in transfer taxes on the taxable transfers to Ross and Marilyn in 2022?

$0
$4,769,800
$9,539,600
None of the above

CLICK TO REVEAL ANSWER

B is the answer. First, remember that a "taxable gift" or "taxable transfer" does not always mean there will be a transfer tax. For example, the BEA and the GST exemption shelter taxable transfers from transfer taxes up to an annually indexed limit. Next, the answer rationale can be summarized by four observations:

The taxable gift to Ross is completely sheltered from the gift tax by Perry's BEA; Ross is not a skip person, so the GST tax does not apply.
The gift to Marilyn is both a taxable GST transfer and a taxable gift.
Perry used his entire BEA to shelter the taxable gift to Ross from gift taxes; there is no BEA remaining to shelter the taxable gift to Marilyn from gift taxes. Therefore, Perry must pay a $4,769,800 gift tax on the gift to Marilyn.
Marilyn is a skip person to her grandfather Perry because she is more than one generation beneath him. However, the taxable GST transfer to Marilyn is completely sheltered from the GST tax by Perry's GST exemption. No GST tax will be due.

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