A Guide to the Generational-Skipping Transfer (GST) Tax Exemption

Benjamin Trujillo J.D., LL.M – Partner

Planning your legacy? The Generation-Skipping Transfer (GST) tax exemption is a powerful allowance that can help you pass on wealth to future generations outside of the estate and gift tax system. Unfortunately, the current exemption is set to expire at the end of 2025, so it’s crucial to understand this benefit and take action if it applies to you.

Part 1: What is the GST Tax Exemption?

The GST tax applies to assets you transfer by gift or inheritance to someone two or more generations below you, like grandchildren or great-grandchildren. Without proper planning, these transfers could be subject to a hefty tax rate of 40% – sometimes in combination with the gift and estate tax, resulting in a total tax of 80%.

The GST tax exemption acts as a shield, allowing you to transfer a specific amount of wealth to skip generations without incurring this tax. In 2024, that amount is the most it has ever been, at $13.61 million per person (and $27.22 million for married couples).

Part 2: How Can You Use the GST Tax Exemption?

Let’s say you want to help your grandchildren with their education or a future home purchase. By effectively utilizing the GST exemption, you can transfer significant sums to them without worrying about the GST tax. This allows you to distribute wealth more evenly across generations, potentially reducing your overall estate tax burden.

The GST exemption can also be used in conjunction with the gift and estate tax exemption. By setting up a trust that benefits your children and grandchildren, you can control how and when they receive the assets and protect your gift from the claims of creditors and ex-spouses while taking advantage of both gift and generation-skipping tax exemptions to remove those assets from the transfer tax system forever.

Part 3: What to Do Before the Exemption Expires?

With inflation adjustments, the current high GST tax exemption is scheduled to return to pre-2017 levels (around $7 million) at the end of 2025. This significant decrease will impact many wealthy families.

Here’s what you can do:

  • Review your estate plan: Consult with a legal, tax, or financial advisor to see if your current plan effectively utilizes the GST exemption. They can help you determine if adjustments are needed before the end of 2025.
  • Consider gifting strategies: If you have a large estate and want to take advantage of the current high exemption, discuss the gifting strategies available to you with your advisor. Remember, the annual exclusion of $18,000 per recipient allows for certain tax-free gifts that don’t count against the GST exemption.
  • Prepare for potential changes: While the future of the GST tax exemption is uncertain, it is prudent to plan for a lower exemption amount.

Don’t let this valuable opportunity slip away! If you have questions about the GST tax exemption or want to discuss how it can benefit your estate plan, we can help you navigate the complexities of the tax code and develop a personalized strategy for passing on your legacy effectively. Understanding and utilizing the GST tax exemption can help create a smoother inheritance process for future generations. Remember, consulting with a qualified advisor is essential for personalized guidance and maximizing the benefits of this tax advantage.

Contact CWJ at: cwj@monetagroup.com

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