The GST tax and your estate plan: What you need to know

GST tax

A not-so-fun truth is this: the generation-skipping transfer (GST) tax is one of the toughest and most complicated in the tax code. Therefore, it is crucial to consider and prepare for it. If you intend to share your wealth with grandchildren or great-grandchildren, or if these generations are likely to benefit from your estate plan, this blog post is for you!

What is the GST tax?

Transfers to “skip persons” are subject to a flat-rate, 40% GST tax, including:

  • Grandchildren
  • Family members more than one generation below
  • Nonfamily members over 37.5 years younger
  • Certain trusts if all beneficiaries are skip persons

Gifts or bequests made directly to a skip person (a “direct skip”) and some transfers made by trusts to skip persons are subject to GST tax. Gifts made outright or to qualified “direct skip trusts” that meet the yearly gift tax exclusion requirements are exempt from it. The gift tax exclusion is currently $16,000 per recipient and $32,000 for gifts divided by married couples.

Why is it so confusing?

The lifetime exemption limit for the GST tax is the same as the lifetime exemption threshold for gift and estate taxes (currently $12.06 million). However, it operates differently. For instance, the GST tax exemption must be awarded to a transfer to shield it from tax. That is unlike the gift and estate tax exemptions, which automatically cover eligible wealth transfers.

Nonetheless, the automatic allocation rules generally work well. It ensures that the distribution of your exemption is in the most tax-advantageous manner. However, as was already mentioned, they occasionally produce unfavorable outcomes. For example, consider creating a trust with part going to your grandchildren and the rest to your children. You rely on automatic allocation regulations to protect the trust from GST. The trust disqualifies itself from GST trust status by granting one of your children a general power of appointment over 50% of the trust’s assets. As a result, distributions or transfers to your grandchildren will be subject to GST tax. On the other hand, you can expressly assign your exemption to the trust.

Distribute your GST tax exemption wisely if you want to give significant gifts to your grandkids or other skip persons, either outright or in trust. We can assist you in developing a plan that takes advantage of the exemption and reduces your liability. Contact our RRBB accountants and advisors today.

© 2022


Get free tax planning and financial advice