Generation-Skipping Transfer Tax 101
Many people are familiar with the existence and some aspects of estate and gift taxes. If you
are part of an ultra-high-net-worth family, it is important to also understand the generationskipping transfer (GST) tax and how it may affect your particular situation. During the planning process, it is vital to consider unique family dynamics, financial goals, and values when deciding
the best tax strategies to distribute your generational wealth.
What Is the 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.
This ensured that large estates still paid 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 $13.61 million for individuals in 2024 (the same lifetime exemption as the
federal estate and gift tax exemption) that can be used when someone wants to make gifts or
leave an inheritance that would otherwise be subject to the GST tax.3 If you have a significant
estate, your family may need to use their GST tax exemption in addition to the estate and gift
tax exemptions.
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 skipped person: the generation between the individual
transferring wealth and the one receiving it4
Why Should You Be Mindful of This Tax?
If you have a substantial estate and are considering making sizable gifts or bequests to skip
persons, you need to work with experienced professionals to ensure that the right strategy is
used to maximize your gift and minimize the tax consequences.
The earlier you can get started, the better your results will be. It will take time and collaboration
with trusted advisors to ensure the best possible outcome. After your estate plan is created, you
will need regular reviews for updates due to changing circumstances.
Professionals to Align Legal and Tax Planning Strategies
You and your loved ones will need comprehensive advice when creating your estate plan to
ensure that legal, financial, and tax implications are all considered in your estate planning
strategy. We welcome the opportunity to collaborate with your existing advisors. When
strategizing the best outcome for you, your loved ones, and your hard-earned money, it takes
expertise from multiple areas to create the best plan possible.
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 Counselors 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.
