GST Tax Exemption

Passing Assets to Grandchildren Through a Generation-Skipping Trust (GST Tax Exemption)

The GST tax exemption
A tool to generate future tax savings

The generation-skipping transfer (GST) tax can have harsh consequences.  Those who take full advantage of GST planning strategies, however, have an opportunity to shield their wealth from tax and build a lasting legacy.

Passing assets to your grandchildren can be a great way to ensure their future is provided for, and a generation-skipping trust can help you accomplish this goal while reducing estate taxes and also providing for your children.

GST basics

The GST tax, in its current form, was created in 1986 to address a perceived loophole in estate tax laws.  Gift and estate taxes were designed to tax property at least once in each generation.  People would make taxable gifts or bequests to their children , who in turn would make taxable gifts or bequests to their children, and so on.

It didn’t take long for affluent families to realize that they could bypass gift and estate taxes in one or more generations by making transfers that skipped a generation.  For example, parents might place assets in a trust that paid income to their children for life and then distributed the trust assets to their grandchildren.  Because the children never obtained control over the trust assets, the value of those assets was never included in their taxable estates.

Ever the diligent fiduciary of collections for the government till, the IRS didn’t really like this scheme of tax avoidance.  The GST tax is intended to replace revenues lost by this estate planning strategy.

A generation-skipping trust allows you to “skip” over the generation directly below you and pass your assets to the succeeding generation. While this type of trust is most commonly used for family, you can designate anyone who is at least 37.5 younger than you as the beneficiary (except a spouse or ex-spouse).

One purpose of a generation-skipping trust is to minimize estate taxes. Estates worth more than $11.7 (in 2021) have to pay a federal estate tax. Twelve states also impose their own estate tax (but not the great state of Texas), which in some states applies to smaller estates. When someone passes on an estate to their child and the child then passes the estate to their children, the estate taxes would be assessed twice—each time the estate is passed down. The generation-skipping trust avoids one of these transfers and estate tax assessments.

While your children cannot touch the assets in the trust, they can receive any income generated by the trust. The trust can also be set up to allow them to have some say in the rights and interests of future beneficiaries. Once your children pass on, the beneficiaries will have access to the assets.

Note however, that a generation-skipping trust is subject to the generation-skipping transfer (GST) tax. This tax applies to transfers from grandparents to grandchildren, even in a trust. The GST tax has tracked the estate tax rate and exemption amounts, so the current GST exemption amount is $11.7 million (in 2021). If you transfer more than that, the tax rate is 40 percent.

The trust can be structured to take advantage of the GST tax exemption by transferring assets to the trust that fall under the exemption amount. If the assets increase in value, the proceeds can be allocated to the beneficiaries of the trust. And because the trust is irrevocable, your estate won’t have to pay the GST tax even if the value of the assets increases over the exemption amount.

Generation-skipping trusts are complicated documents. Consult with your attorney to determine if one would be right for your family.

You can schedule an appointment with the Law Office of Antoinette Bone in our Euless, Texas office by clicking the button below, or by calling us at (817) 462-5454.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.

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