What is the Generation Skipping Transfer Tax?
The federal generation skipping transfer (GST) tax is a tax on the transfer of property to a person who is two or more generations below the generation of the transferor. The transferor is the person who has transferred property to another, or to a trust for the benefit of another, in a manner that is subject to the gift or estate tax. The most common example of a GST is a gift or bequest from a grandparent to a grandchild. The GST tax is imposed on gifts a transferor makes during life or after death. It is applied separately from, and in addition to, the federal estate and gift taxes.
Each US citizen receives an exemption for the GST tax that, in 2016, allows one to transfer $5.45 million of property during life or at death free from GST tax. This GST exemption amount, which increases each year with inflation, is allocated, either by election or automatically, to the transfers that may be subject to the GST tax.
Generally, the GST tax is only a concern if a transferor will be giving more than the $5.45 million exemption amount away to grandchildren, trusts for grandchildren, or other people two or more generations younger than the transferor.
What is the purpose of the Generation Skipping Transfer Tax?
The transfer tax regime assumes that one generation will pass wealth to the next generation, which will then pass wealth to the next, without skipping a generation in between. In that way, as wealth gets passed from one generation to the next, it will be subject to a transfer tax (either estate or gift) at each generational level.
However, before the implementation of the GST tax, wealthy individuals could circumvent the intergenerational taxation of assets. Savvy transferors who had enough wealth could leave a portion to a child and gift the balance it to future generations, either directly or in trust. This technique allows transferors to avoid the transfer tax that would have otherwise been imposed at each successive generation’s level.
For example, if grandfather passes $100 million dollars to child, and child then passes $75 million of that inheritance to grandchild, the assets will be subject to the estate tax at both grandfather’s death and at child’s death. If grandfather passes $25 million to child and $75 million directly to grandchild, the $100 million will still be taxed at grandfather’s death. But, the $75 million that went to the grandchild will avoid another estate tax at child’s death. It will not be included in child’s estate since child never received it. If grandfather had chosen to put the assets in a trust for multiple generations of beneficiaries (known as a dynasty trust), the assets could pass for generations without ever again being subject to another transfer tax.
The GST tax is effectively a 'backstop' tax that prevents a wealthy transferor from avoiding transfer taxes by skipping over generations of beneficiaries. With the GST tax, property that would otherwise be taxed only once at the transferor’s level will be taxed again when it passes to younger generations.
Do I need to be concerned about the Generation Skipping Transfer Tax?
When meeting with an attorney to discuss your estate planning goals, it is important that you are aware of and discuss the total value of your estate assets. To help our clients address this issue, Swenseth Law Office, works with estate planning clients to put together an Asset Value List to determine whether there are any possible GST tax issues and possible alternative planning options, while also creating a snapshot of your wealth and accounts to assist your personal representative and beneficiaries in the event of your death. To schedule an appointment to review your estate plan, call 701-662-5058.