The Generation Skipping Transfer Tax, or GSTT, is a federal tax imposed on transfers of property made to individuals who are at least two generations younger than the donor. This tax is imposed in addition to any gift or estate tax that may be owed on the transfer.
The purpose of the GSTT is to prevent wealthy families from avoiding gift and estate taxes by simply skipping a generation and transferring assets directly to their grandchildren or other young relatives. Without the GSTT, individuals could give large sums of money or valuable property to their grandchildren or other young relatives, who would then be subject to much lower gift and estate tax rates.
To calculate the GSTT, the value of the transfer is multiplied by the applicable GSTT rate. The current rate is 40%, which is the same as the top gift and estate tax rate. The GSTT rate may change from year to year as part of changes to the tax code.
How can you get around the GSTT?
There are several exemptions and exclusions available to individuals who wish to make transfers subject to the GSTT. The most commonly used exemption is the GSTT exemption, which allows an individual to transfer up to a certain amount of property to a skip person without incurring the GSTT. As of 2023, the GSTT exemption is $12.92 million per person.
In addition to the GSTT exemption, there are several other strategies that individuals can use to minimize or avoid the GSTT. These include:
1. Lifetime Exemption:
Individuals can use their lifetime gift and estate tax exemption to make transfers subject to the GSTT. For example, an individual could make a gift of $1 million to a grandchild and use $1 million of their lifetime gift and estate tax exemption to shelter the transfer from the GSTT.
2. Annual Exclusion:
Individuals can make gifts of up to $17,000 per year per recipient (this is the Annual Exclusion amount for 2023) without incurring any gift tax or GSTT. This can be a useful strategy for making regular transfers to skip persons without incurring any tax liability.
3. Direct Payments:
Individuals can pay for a skip person's tuition or medical expenses directly without incurring any tax liability. This can be a useful strategy for transferring wealth to grandchildren or other young relatives without incurring any tax liability.
Individuals can use trusts to transfer property to skip persons without incurring the GSTT. There are several types of trusts that can be used for this purpose, including Dynasty Trusts, Grantor Retained Annuity Trusts (GRATs), and Qualified Personal Residence Trusts (QPRTs).
Overall, the GSTT is a complex area of the tax code that requires careful planning and expert advice. By working with a qualified estate planning attorney (contact us for help), you can minimize or avoid the GSTT and ensure that your wealth is passed down to future generations in a tax-efficient manner.