Paralegal Advanced Competency Exam (PACE) Practice Exam

What does the GST tax impose on?

1. Wealth transfers between siblings

2. Property transfers within a single generation

3. Trust interests passed to younger generations

4. Gifts made to charity

The correct answer is: Trust interests passed to younger generations

The GST tax, or Generation-Skipping Transfer tax, specifically targets transfers of wealth that skip generations. This means it is designed to impose a tax on certain gifts or inheritances that are given to individuals who are at least two generations younger than the transferor. This encompasses trust interests that are passed down to grandchildren or other beneficiaries who are not the immediate heirs, thus reflecting the intent of the tax to address large transfers of wealth that bypass a direct generational link. The reason this choice is correct lies in the structural design of the GST tax, which seeks to curb potential tax avoidance strategies that could occur when wealth is transferred directly to younger generations rather than being taxed first at the generational level of the immediate heirs. In contrast, other options do not align with the specific scope of the GST tax. Wealth transfers between siblings are not subject to the GST tax, as this transfer occurs within the same generation. Property transfers within a single generation also fall outside the GST's application, as the tax specifically targets inter-generational transfers. Gifts made to charity are typically exempt from the GST tax, as charitable donations do not involve a transfer of wealth to an individual that skips generations. Thus, the focus of the GST tax is precisely tailored to transfers that involve