Generation Skipping Tax

The Generation Skipping Tax (GST) is a tax that is levied against gratuitous transfers of property during life or at death that exceed the certain exemption limit and the transfer is to a person who is two or more generations below the grantor of the gift. The current exemption limit for 2016 is $5.45 million, which means you can transfer up to $5.45 million and not be taxed.

History of the GST

The GST came into being by trying to stop individuals from bequeathing property at death to grandchildren and thus avoiding paying an estate tax on the transfer. The first version of this law came into existence in 1976. This first version of the law was difficult to implement and was then repealed and replaced with the current law in 1986. The current law ensures that taxes are paid at each generational level and that individuals cannot escape the tax by using a trust.

Advantages of the GST

While the government has closed this tax-avoidance-loophole, there are still some advantages to using the GST. It is possible to set up a generation skipping trust (which skips the children and goes directly to the grandchildren) and fund it up to the exemption limit, which in turn minimizes taxes.
An individual can also create a dynasty trust, which allows property to pass to multiple generations without the GST being applied to every generation level. A dynasty trust will not reduce the taxation level of the creator of the trust, but it will potentially save the beneficiaries of the trust from being taxed.

Application of the GST

Due to the high exemption rates, most people will not have enough assets to exceed the limit set by the government. Remember, you do not have to worry about the tax unless your assets exceed $5.45 million (in 2016). The exemption does increase from year to year to allot for inflation, so be sure to check in with your attorney or financial advisor for the current rate. If you think the GST may be applicable to your situation, please consult with an estate planning attorney to develop a plan that will best suit your needs.

Authored by: Mary E. Zoldak

MacLaren Law LLC

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