How to Avoid the Generation Skipping Transfer Tax
If you understand and work with tax laws, your estate plan will be all the stronger for it. Knowing when certain taxes will apply, especially those that occur after your passing, is very important. Planning ahead is the only way to avoid incurring extraneous taxes like the generation-skipping transfer tax. At Phelps LaClair, we can help you prepare and plan ahead so your assets remain where they belong.
What Is the “GST” Tax?
The generation-skipping transfer (GST) tax is imposed when property transfers skip a generation. For example, Beth has chosen her grandson to be her “skip person”—the person she transfers her vacation home to—instead of one of her children. Because he’s two generations below Beth, the grandson will be subject to the generation-skipping transfer tax.
A trust may also be considered a “skip person” for tax purposes if the entire trust, including all interests, assets, and properties, is held by the skip person.
There are three types of skips. The first is a direct skip, the next is a taxable distribution, and the third is a taxable termination. An example of a direct skip would be when a transferor dies and leaves a trust that benefits his group of seven grandchildren. When distributions are made to the grandchildren from that trust, the GST will be applied.
Will GST tax apply to my estate?
The generation-skipping transfer tax is not something that every estate needs to deal with. The 2021 generation-skipping transfer tax exemption is currently $11.7 million. For any assets transferred beyond this amount, the GST will apply. Currently the tax rate is 40% and is applied on top of federal estate tax.
Let’s say Beth has an estate size of $45 million. She will be able to give $11.7 million to her grandchildren, without the GST tax applying to her transfer. However, Beth will incur federal estate tax and GST tax if she leaves the remaining $33.3 million to her grandchildren (or anyone 37.5 years younger than her).
What can Beth do to avoid paying the generation-skipping transfer tax and leave as much of her estate as possible to her grandchildren? She should consult a professional who understands tax law.
How to Avoid the GST Tax
Do you think your estate is likely to face the generation-skipping transfer tax? If so, talking to us at Phelps LaClair will help clarify which options are right for you. Each estate is different, and needs different tools depending on the specific situation. We can help you avoid the GST tax according to your needs/goals/wishes and the current tax laws.
At Phelps LaClair, we know estate tax laws. Jeffrey LaClair specialized in tax law, with a focus on estate planning, while attending New York University. His education and early work inspired what he does now.
It’s our goal to build comprehensive plans that integrate smart estate tax planning to avoid disputes amongst family members or the IRS, and to preserve your estate through minimizing hefty taxes like the GST.