For high net worth individuals, estate taxes can be hefty. In the past, one strategy to reduce estate taxes was to “skip” a generation of heirs. But many people are unaware of an additional tax that could apply when transfers are made to their descendants.
The generation-skipping transfer tax (or GSTT) is a federal tax on gifts and inheritance above the estate/lifetime gift exclusion. This tax prevents you from deliberately skipping your children in order to avoid taxes upon their death. In other words, the GSTT is an additional tax on the transfer of property and assets that skips a generation.
The current GSTT tax rate is a flat 40%, which has been in effect since 2014. As of January 1, 2022, the GSTT exemption was set at $12.06 million for individuals, and $24.12 million for married couples. The provisions of the generation-skipping transfer tax can be complex, so it’s beneficial to find an experienced estate planner who can help you avoid complications with the transfer of your assets.
Trusting in your trust
A GST taxation depends on whether the transfer is a direct or indirect skip. In a direct skip, property is transferred from one individual to a skip person. Direct skips are only taxed once, regardless of how many generations are skipped. An example of this would be when a grandfather leaves property to a granddaughter. An indirect skip has intermediate steps, and taxes occur when the estate passes to the skip person. For example, a mother sets up a taxable termination to her son, a non-skip person, who passes the mother’s estate to his daughter. His daughter will pay the GSTT.
However, by utilizing certain exemptions and estate planning techniques, it’s possible for high net worth individuals and estate planners to create long-term wealth which is exempt from generation-skipping taxes.
Much like the annual gift exclusion, there is an annual GSTT exclusion. If a grandparent wanted to make a gift (up to $16,000 per recipient) directly to a grandchild, no gift tax or GSTT would be due. A person could also place their assets in a trust using the GSTT exemption, which would then pay income to a child for life, with the remainder passing to grandchildren or future generations. With proper planning, it could be possible to take advantage of both the GSTT exemption and the gift and estate tax exclusion.
Another strategy to transfer wealth over multiple generations is to create a dynasty trust. Dynasty trusts are designed to avoid or minimize estate taxes with each generational transfer. By placing assets in this type of trust and making specific distributions to each generation, the trust itself avoids estate taxes with each transfer, regardless of asset growth within the trust.
Is it for you?
Generation-skipping transfer tax issues can be complex and confusing, but with proper planning you can make the GSTT exemption work for you, allowing you to pass more wealth to younger generations. With the help of an experienced estate planning attorney, a person can create an irrevocable trust that incorporates both asset protection provisions and generation skipping tax strategies. The Jeffrey M. Verdon Law Group has helped affluent clients with high income estate planning for decades. If you are a taxpayer with assets of $10 million or more, and are looking for superior legal services in Newport Beach, California, call us today.