If you’ve ever sought the advice of an estate planning professional, you’ve probably heard of Generation Skip Transfer Tax (GST). It is likely that you and your descendants will not be subject to this tax – either because of the gift tax of $ 11.7 million per person, the federal inheritance tax and the tax exemption. life of the GSTT, or because of the planning which subjects the trust assets to the inclusion of the inheritance tax in the lower generations. to avoid GSTT. But I’m getting ahead of myself.
What is the generation jump transfer tax?
Another transfer tax similar to gift tax and inheritance tax is the generational transfer tax. The GSTT applies to all transfers made by gift or inheritance to anyone considered an “unauthorized person” under the law and to distributions from all trusts to an unauthorized person if the trust was established on 25 September 1985 or later (with the exception of a trust established by a non-U.S. grantor financed only with non-U.S. situated property, that is, property that is not subject to U.S. taxation by reason of ‘a treaty or the exclusive power of another sovereign).
For this discussion, a taxable transfer is any property you give to an irrevocable person or trust for less than its fair market value. A jump person is someone who is assigned a generation at least two generations below you. So who are these skippers?
- First generation: you and your spouse, your siblings and their spouses.
- Second generation: Your children and their spouses.
- Third Generation (ignore individuals): Your grandchildren and their spouses (and all subsequent descendants). Also included as ignored are: unrelated people who are over 37 and a half years younger than you.
The purpose of the GSTT is to capture and tax all taxable transfers that can avoid the application of gift and inheritance tax by skipping a generation or more. An example would be writing a check for $ 30,000 to a grandson for a down payment on a house. This donation would skip your own child, thus avoiding the possible donation tax that would apply if the donation passed from you to your child, and then from your child to your grandchild. Therefore, it is subject to GSTT.
Another example would be to establish an irrevocable trust for the benefit of your eight grandchildren with instructions for the trustee to pay all their college expenses until the youngest of the grandchildren is 25 years old. At this point, the trust would split into eight shares, with each grandchild receiving their share directly and without trust. Each distribution of this trust would be subject to GSTT, including the final division at the end of the trust.
The social science argument behind the GSTT is that if property could be transferred to successive generations without paying a transfer tax on each successive transfer, wealthy families would end up accumulating such a large percentage of the nation’s total wealth that the upward mobility for the lower economic classes would be unfairly restricted and future generations of middle class workers would be plunged into poverty.
How GSTT Works
Because Congress intends that transfer taxes apply only to wealthy families, the law provides for a lifetime exemption threshold from all such taxes and an annual exclusion for lifetime gifts. The GSTT exemption and the applicable exclusion are determined annually and are indexed to inflation.
Federal inheritance tax, gift tax and the GSTT exemption currently stand at $ 11.7 million per person, with a top tax rate of 40%, which is expected to ‘switch off’ at the end of 2025 to pre-2018 levels (adjusted for inflation). Legislation was introduced this year proposing to lower the GSTT exemption and cap the duration of GSTT exempt trusts at 50 years – presumably valuing GSTT at the end of the period at the same rate as tax. on estates.
The GSTT must be paid either when the declaration of inheritance is due (in the case of a transfer on death), when the declaration of donation is due (in the case of a life transfer) or when a trust-only for the benefit of jump people makes a distribution or ends in favor of a jump person – as in the example above of the trust that pays for the college education of the grandchildren. The tax is either paid by the trustee, executor or captain who receives the transfer, depending on the circumstances.
Exemptions and exclusions
However, proper application of gift tax, inheritance tax, and the GSTT lifetime exemption exempt most trusts and estates from paying transfer taxes. Your estate planning professional will also ask you to include a provision in your estate plan that:
- Isolates any non-exempt GSTT property to a separate trust that can either control distributions to properly pay tax or
- Exposes trust property to inheritance tax so that it may be subject to gift tax, inheritance tax, and the lifetime trust beneficiary exemption.
In addition to the exemptions, there is another exception for a taxable transfer to a grandchild whose parents are deceased. This applies if the parent died before the taxable transfer or had died when the irrevocable trust was signed.
To benefit from these exemptions and exclusions, you must file a donation tax return for all lifetime taxable transfers that you make in order to allocate the cumulative exemption for donations, inheritances and GSTT that year. However, if the total taxable transfer to a person in a single year is less than the annual donation exclusion limit, currently $ 15,000 ($ 30,000 if your spouse joins your donation), then no declaration is required. So that $ 30,000 check for the down payment on your grandchild’s new home could actually avoid the TPPS if your spouse accepts the donation and you do not make any other taxable transfers to that grandchild there. same year.
Finally, if you file a gift tax return to allocate part of your gift tax, inheritance tax and the GSTT lifetime exemption to this irrevocable trust for college studies of your grandchildren, then this trust is an estate tax and GSTT exempt trust. It will never pay tax on transfers, even when it ends (although any proceeds your grandchildren receive directly may be taxed if they then make taxable transfers to someone else).
This tax-exempt status applies for as long as the trust lasts, unless it violates state law limiting the duration of trusts or a prohibition on a restriction on the alienation of real property. So, you could draft the aforementioned college education trust so that instead of ending when the youngest beneficiary turns 25, it could instead split into eight separate stock trusts for the benefit of each. grandchild and their descendants for as long as state law allows (which is 360 years old forever, depending on the state) and avoid transfer taxes at all times.
The value of expert planning advice
Whether your current estate is likely to be subject to federal inheritance tax on death, that is, it is or may be greater than the lifetime transfer tax exemption, and / or if you plan to donate in excess of the annual exclusion limits, you should seek advanced estate planning advice today to appropriately apply your tax exclusions and exemptions whenever you or your trusts will make a taxable transfer.
An estate planning professional will advise you on the best way to structure your gifts and trusts so that you avoid paying more transfer taxes than the law requires, which is not at all for the vast majority of people. taxpayers.
Senior Vice-President, Silver Trust Company
Timothy Barrett is Senior Vice President and Legal Counsel at Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, Bingham Fellow 2016, a member of the board of directors of the Metro Louisville Estate Planning Council, and a member of the Bar Associations of Louisville, Kentucky and Indiana, and the ‘University of Kentucky Estate Planning. Institute Program Planning Committee.