D intends to create a trust to pay medical and educational expenses for his children, grandchildren and their descendants. D does not assign any GST exemption to the trust. Which payments will be subject to GST tax?

D intends to create a trust to pay medical and educational expenses for his children, grandchildren and their descendants. D does not assign any GST exemption to the trust. Which payments will be subject to GST tax?

• A. Payments made to a grandchild as reimbursement for a liposuction procedure.
• B. Payments made directly to a grandchild's nursery school.
• C. Medical insurance for a great-grandchild.
• D. None of the above

Answer: (A)

The key idea is how the GST tax treats transfers to skip persons and when direct payments to providers avoid GST. If a trust makes a payment to a descendant for medical or educational expenses directly to the provider, that payment is not taxed for GST. But if the payment is to the beneficiary (not to a provider) for a medical expense, it can be subject to GST tax, especially when the trust has not allocated GST exemption to shelter the transfer. In this scenario, reimbursements for medical expenses that go to the grandchild (not to a provider) would be subject to GST tax. Paying directly to a nursery school for education is exempt because it’s a direct payment to an educational institution. A payment for medical insurance premiums is not treated as a medical expense paid to a provider, so it does not fall under the medical-expense exclusion. Therefore, the reimbursement to a grandchild for a liposuction procedure is the GST-taxable payment.

The key idea is how the GST tax treats transfers to skip persons and when direct payments to providers avoid GST. If a trust makes a payment to a descendant for medical or educational expenses directly to the provider, that payment is not taxed for GST. But if the payment is to the beneficiary (not to a provider) for a medical expense, it can be subject to GST tax, especially when the trust has not allocated GST exemption to shelter the transfer.

In this scenario, reimbursements for medical expenses that go to the grandchild (not to a provider) would be subject to GST tax. Paying directly to a nursery school for education is exempt because it’s a direct payment to an educational institution. A payment for medical insurance premiums is not treated as a medical expense paid to a provider, so it does not fall under the medical-expense exclusion.

Therefore, the reimbursement to a grandchild for a liposuction procedure is the GST-taxable payment.