The generation-skipping transfer tax (GSTT) is a federal tax that results when there is a transfer of property by gift or inheritance to a beneficiary (other than a spouse) who is at least 37½ years younger than the donor. The tax applies when the transferred amount exceeds $11.7 million per individual (for 2021). This amount is set to expire in 2026 and expected to drop to $5 million or even lower. The GSTT tax rate is a flat 40%.
There are exemptions and exclusions to this rule which may create long-term wealth-building opportunities. GSTT rules apply to transfers (usually grandchildren) who are two or more generations younger than you. Transfers to your own children are not considered generation-skipping. Additionally, assets transferred to a grandchild whose parent (your child) is deceased are not subject to the tax.
The GSTT does not apply to qualified nontaxable gifts including annual exclusion gifts (up to $15,000 per recipient per year) and payments for tuition, medical care or medical insurance made directly to a school, doctor, hospital, etc. Gifts made for the benefit of a grandchild in these forms are generally tax-free.
Our strategies preserve your assets and help you create long-term wealth-building opportunities. A generation-skipping transfer strategy places your assets in a trust using your GSTT exemption. The trust pays income to your children for life with the remainder passing outside of your children’s taxable estate to your grandchildren or future generations after your children have deceased.
A direct generation skip strategy bypasses your children and gives the assets qualifying for the exemption amount either directly to your grandchildren or places assets in a trust for the benefit of future generations.
First Class Counsel gives you the flexibility to make generation-skipping transfers during your lifetime or plan for them to occur after your death. During your lifetime, all applicable transfers of wealth that you make are automatically applied to your lifetime GSTT exemption, unless you elect otherwise. For transfers at death, the exemption may be allocated as you direct in your trust.
The rates and rules for generation-skipping taxes can be complicated and subject to change. Our professionals at First Class Counsel will determine if and how to implement the generation-skipping transfer tax as part of your estate plan.