Is it possible that once the lifetime exemption is used up (currently
you can gift up to $1,500,000) that a $387,000 gift to a grandchild
could generate a gift tax and a generation skipping tax of
approximately $400,000 ?

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Request for Question Clarification by denco-ga on 13 Apr 2006 12:31 PDT

Howdy sport5-ga,

My figures are showing such a gift generating something closer to $330,000
in taxes.  Have you received a statement, etc. that indicates the $400,000
figure?  Thanks!

Looking Forward, denco-ga - Google Answers Researcher

It is entirely possible to come up with a combined gift tax and
generation skipping tax of more than $400,000 on a gift of $387,000. 
The key thing to remember is that the generation skiping tax paid by
the donor is treated by the IRS as an additional taxable gift by the
donor to the recipient, which makes the gift tax higher than you would
expect.

Assuming a donor in the highest gift tax bracket (47% in 2005) who had
used up all unified credit and GST exemption, a gift of $387,000 would
be taxed as follows:

GST would be $387,000  x 47% = $181,890

The deemed gift for gift tax purposes would be $387,000 + $181,890 = $568,890

The gift tax on $568,890 would be $568,890 x 47% = $267,378

Total tax would be $181,890 + $267,378 = $449,268

Of course, the total tax would be lower if the donor is not in the
absolute top tax bracket.  Once the generation skipping tax comes into
play, it's very easy to have the total tax be above $400,000 on a gift
of $387,000.

The section "The key thing to remember is that the generation skip[p]ing tax
paid by the donor is treated by the IRS as an additional taxable gift by the
donor to the recipient ..." is wrong.

The Generation Skipping Tax (GST) is an additional tax, but is not considered
an additional taxable gift.

The website of "The Law Offices of Jimmie L. Joe" gives a good example.
http://www.theestateplanninglawyer.com/articles_six.html

"The GST Tax is an additional tax separate from the estate tax. Thus, for
example, if $2,500,000 of the couple?s $5,000,000 estate (after deducting the
couple?s estate tax exemptions) were left to the grandchild outright,
$1,250,000 (50%) would be paid in estate taxes and $625,000 (50% X $1,250,000)
would be payable in GST taxes, leaving the grandchild with a total inheritance
of $625,000."

Using the above percentages on the question's numbers would give us:

Estate taxes - $387,000 x 50% = $193,500
GST - $193,500 x 50% = $96,750
Total taxes - $290,250

My research shows the percentages of 50% are a bit low, hence my original
estimate of around $330,000.

Looking Forward, denco-ga - Google Answers Researcher

Keep in mind that the unified transfer tax and the generation skipping
tax are separate taxes.  Moreover, the Unified Credit and the GST
exemption are both applied independetly.

The GST exemption was $1,120,000 in 2003 (future years will be
slightly higher because of inflation).  That means you can give that
much in generation skipping gifts in your lifetime EXEMPT from the
GST.  The regular transfer tax still applies to that type of gift, so
it can still eat into the unified credit, even if the GST exemption
covers it.

For example, a $1,000,000 gift to your grand child would be subject to
both gift tax and GST.  You would be able to exempt out of the GST and
then apply some of your unified credit to exempt the $1,000,000 from
regular transfer tax.

Combined gift and GST tax should not produce more tax than the
underlying gift, though the combined rates can be very high.  Be sure
that you have actually exhasuted your full GST exemption, though.

Also, with those types of amounts at stake (assuming these facts are
real and not for a homework assignment) you absolutely need to find a
top notch CPA, or better yet, a tax attorney.

People really should be opining here unless they know what they are
talking about, and there is a vast difference between the estate tax
treatment of the GST and the gift tax treatment of the GST.

Here's Internal Revenue Code Section 2515: "In the case of any taxable
gift which is a direct skip (within the meaning of chapter 13), the
amount of such gift shall be increased by the amount of any tax
imposed on the transferor under chapter 13 with respect to such gift."

Translation: If a taxable gift is also a direct skip for
generation-skipping transfer (GST) tax purposes, the amount of the
taxable gift is increased by the amount of any GST tax imposed on the
transferor with respect to the gift.

I stand by my first answer.