Generation-Skipping Transfer Tax 101
Many of you are likely familiar with estate and gift taxes. However, dealing with the generation-skipping transfer (GST) tax comes up less often since it usually only affects ultra-wealthy clients.
Estate planning attorneys, financial planners, and tax advisors must understand the GST tax
and learn how to avoid it to help affluent clients accomplish effective planning. Explaining the
GST tax to clients is easier if you share examples of how it might impact their particular
situation. It is also vital to consider unique family dynamics, financial goals, and values when
recommending the best tax strategies to distribute generational wealth.
What Is Generation-Skipping Transfer Tax?
The government collects federal estate taxes to generate revenue when wealth is passed down
to subsequent generations. When people die, they usually leave their money first to their
spouses, then to their children, then to their grandchildren, and then to more distant relatives. At
each passing of generational wealth, the government collects an estate tax.
Wealthy families found a way to avoid estate tax by skipping a generation and transferring
wealth directly to grandchildren and great-grandchildren, allowing them to pass down more
wealth to future generations. Estate taxes were avoided when the skipped generation (in our
example, the children) died because the children never owned the money or property.
The government responded with legislation in 19761 and again in 1986,2 attempting to eliminate
the transfer tax advantage of skipping a generation by imposing a GST tax when a skip occurs,
ensuring that large estates still pay estate tax at each generation.
The GST tax rate is currently 40 percent (the same as the highest federal estate and gift tax
rate) so the tax burden on high-net-worth individuals can be substantial. Luckily, there is a GST
exemption amount of $13.6 million for individuals in 2024 (the same as the federal estate and
gift tax exemption) that can be used when clients want to make gifts or leave an inheritance that
would otherwise be subject to the GST tax.3 This means that only large estates are truly
impacted by the GST tax.
Who Are the Parties Involved in a Generation-Skipping Wealth Transfer?
There are typically three parties involved in a generation-skipping wealth transfer:
- The transferor: the person making the wealth transfer to an individual or a trust
- The skip person: the person receiving the money or property, who must be two or more
generations removed from the individual making the transfer or is at least 37 ½ years
younger than the transferor; a skip person may also be a trust in some instances
- The non-skip person or the skipped person: the generation between the individual
transferring wealth and the one receiving it4
Why Should Clients Be Mindful of This Tax?
Clients with substantial estates who are considering making sizable gifts or bequests to skip
persons need to work with experienced professionals so they understand the tax consequences
of these gifts or bequests, and so they can develop a strategy to properly utilize their GST tax
exemption.
The earlier you can get your client started, the better the results. It will take time and
collaboration with other professionals to ensure the best possible outcome. Additionally, as with
any type of estate planning, you will need to remind the client about regular reviews for updates
to their plan due to changing circumstances.
Partnering with Professionals to Align Legal and Tax Planning Strategies
Working together, we can provide our clients with comprehensive advice, ensuring that legal,
financial, and tax implications are all considered in their estate planning strategies. This will
enhance the overall quality of the service and expertise your clients receive. We welcome the
opportunity to partner with you to develop strategies to assist our mutual clients.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
