Complicated tax laws apply to transfers that skip a generation or more. The generation skipping transfer tax, GST tax or GSTT, is applicable to transfers, whether direct or made in trust, to a transferee who is at least two generations below the generation of the transferor.Gifts you make during your lifetime or bequests you leave to heirs of your estate may be subject to the GST tax. For example, the GST tax may apply when a grandparent gifts property to a grandchild or great grandchild if it exceeds the exemption amount. See 2019 Gifting Limits and 2018 Gifting Limits.
Any GST tax owed is in addition to federal estate taxes or gift taxes. Even if these taxes apply to your gifts or your estate, they may be eliminated by the unified credit.
The generation skipping tax can also apply to transfers other than those between a grandparent and grandchildren or great grandchildren. It also applies to transfers to any beneficiary or transferee that is two or more generations below the first generation, meaning the transferor or decedent. See gifts and gifting.
GSTT, Estate, and Gift Tax Guides
If you are responsible for drafting estate planning documents or calculating taxes due and preparing returns,
refer to one of the reference guides posted on our
Estate Tax Books page. Our list includes estate, gift, and GSTT guides that provide information on recent changes in federal tax laws as well as relevant tax forms, such as IRS Form 709. Related: Gift Tax Return.While there are many reasons to discuss your estate plan with a qualified attorney, as well as your tax professional, the potential loss of family wealth due to federal and state estate taxes is one of the most significant. Your estate planning attorney may recommend certain transfers to one or more types of estate planning trusts as part of your estate plan. It takes time to set up estate planning trusts, engage in an annual gifting plan, and take other actions that may be necessary to address your concerns about estate, gift, and GST taxes. Therefore, it is important that an estate plan be developed early, rather than waiting until you develop an illness or suffer an unexpected health emergency. To get started, see make an estate plan. By developing a sound tax strategy, an estate planning attorney can potentially increase the amount of wealth your family is able to preserve by a substantial amount. This can make a tremendous difference in the lives of your children, grandchildren, great grandchildren or other heirs. If you are making estate planning decisions that may be affected by the generation skipping transfer tax exemption amount for 2018, consult an attorney or CPA. See finding an attorney for a list of tips on how to avoid paying too much for an estate plan.
2018 and 2019 GSTT Rates
2019For 2019, the exemption amount per person for generation skipping transfers is $11,400,000. For 2019, the exemption amount for a married couple is $22,800,000. This is known as the GST exemption.2018For 2018, the exemption amount per person for generation skipping transfers is $11,180,000. For 2018, the exemption amount for a married couple is $22,360,000. The GST exemption amount for 2018 is an increase over the amount for 2017.2017For 2017, the exemption amount per person for generation skipping transfers is 5,490,000 USD.2016For 2016, the exemption amount per person for generation skipping transfers is 5,450,000 USD.2015For 2015, the exemption amount per person for generation skipping transfers is 5,430,000 USD.2014For 2014, the exemption amount per person for generation skipping transfers is 5,340,000 USD.2013The GST exemption amount for 2013 was 5,250,000 USD.GSTT is in addition to estate taxes and gift taxes. If generation skipping transfer tax is owed, the top tax rate for 2017 is 40 percent. At this tax rate, nearly half the value of an estate in excess of the threshold amount could be lost to federal taxes. To the extent state death taxes are owed, the amount received by heirs and beneficiaries may be reduced even further.
What is the Purpose of the GST Tax?
When parents die they usually pass their estate to their children. As a result, the federal estate tax is usually applied on transfers to each generation, allowing the federal government to capture that tax revenue. The generation skipping transfer tax was enacted to prevent wealthy families from avoiding federal estate taxes for one or more generations by transferring property directly to their grandchildren or great grandchildren instead of their children.
What is a Generation Skipping Trust?
A generation skipping trust allows a grandparent to transfer property to his grandchildren or great grandchildren without paying an extra layer of estate tax. A GSTT trust can be thought of as a trust by a grandparent for a grandchild that bypasses the grandparentís own child. There can be three or more generations involved in a generation skipping trust. The grandparent is the first generation. The grandparentís child is the middle or second generation. The grandchild is the third or final generation. The beneficiary receiving the generation skipping transfer is referred to as the skip person.
In a generation skipping trust, the person in the first generation, such as the grandparent, places property in the trust. The income from the GSTT trust is paid to the beneficiaries in the second generation, such as the grandparentís children. When the grandparent dies, estate tax is applied on the amount of property in the trust. When the second generation beneficiary dies, the property in the trust is transferred to the third generation beneficiaries. The principal amount in the trust is not subject to estate tax when it is transferred to the grandchildren or third generation beneficiaries.
If you are concerned about estate taxes, gift taxes or generation skipping taxes, consult a lawyer or a tax advisor to determine if a GSTT trust should be part of your estate plan. Because of the complex nature of these trusts and the current state of flux of U.S. estate tax laws, do not attempt to create and fund such a complicated estate planning device without guidance from a licensed professional. To compare types of estate planning trusts and their advantages, see more about trusts.
Paying GST Tax Due
Information on IRS Form 706 for computing the GST tax due is available on the IRS website.This article was updated on December 2, 2018.
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