You may have noticed in your will or a relative’s multiple statements regarding “GST” and you may be asking what does that stand for? GST is short hand for Generation Skipping Tax and frankly that is the only simple part about this tax law but here is my quick reference guide on what you need to know, and what you need to ask your estate attorney.
- The GST is the government’s defense against an endless run around estate and gift taxes and GST software helps businesses efficiently manage tax compliance by automating tax calculations and filings.
- It imposes a flat tax on gifts and bequests above the estate/lifetime gift exclusion that avoid gift or estate tax by skipping one or more generations, such as to grandchildren.
- It is relatively straightforward in its provisions, but financial advisers need to be aware of recent and ongoing changes in exemption amounts, allocations and tax rate and the corresponding implications for estate plans.
- One important planning element is the optimal use of the lifetime exclusion in tandem with the annual gift exclusion, along with other common estate planning mechanisms.
What is this for?
- This is actually a (ironically) simplified version of a Congressional Act that came about in 1976.
- Back then, Congress explained that the tax was designed “to remedy the perceived abuse of using a trust to benefit several generations while avoiding Federal Estate Tax during the term of the trust.”
- Here is what Congress saw happening: Wealthy families were going to estate planners who created a life estate in their assets for their kids, followed by a life estate in the assets for their grandkids, followed by a life estate in the assets for their great-grandkids and so on. Since life estates are not subject to the federal estate tax, these plans effectively moved incredible amounts of wealth from generation to generation without any risk of the estate tax. Less wealthy families were paying more in estate tax than more wealthy families, who could afford to engage in sophisticated estate planning.
What is the law today?
- You may have heard the law was supposed to sunset i.e. end in 2011 but this did not occur, Obama has stated his intent to maintain the estate tax.
- Currently the U.S. generation-skipping transfer tax imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren.
- The generation-skipping tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level.
Using the generation-skipping tax exemption in this manner offers two important advantages:
- The trust will escape all transfer taxes when the children die and will pass tax-free to the grandchildren.
- The trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. Had the trust property been left to the children outright, the property would be subject to such claims.