April 30, 2024 •HoganTaylor
Are you contemplating passing on assets to your grandchildren or loved ones more than one generation below you? Or, do you have plans to leave a financial legacy for non-relatives significantly younger than you? In such instances, your estate plan should encompass not just gift and estate taxes but also the often-overlooked generation-skipping transfer (GST) tax.
Understanding the GST Tax:
The GST tax, nestled within the complexities of the Internal Revenue Code, stands as one of the most formidable taxes. It imposes a flat 40% tax rate on asset transfers to "skip persons" – namely, your grandchildren, other family members more than one generation below you, or non-relatives over 37.5 years younger. This tax operates independently from, and in addition to, gift and estate taxes, potentially eroding a substantial portion of your accumulated wealth.
Fortunately, there's a silver lining in the form of a generous GST tax exemption. Thanks to the Tax Cuts and Jobs Act, estates of individuals passing away between December 31, 2017, and January 1, 2026, enjoy an inflation-adjusted exemption of $10 million ($13.61 million for 2024). However, without legislative intervention, this exemption is set to revert to an inflation-adjusted $5 million from January 1, 2026.
Optimizing Your Exemption:
Yet, harnessing this exemption to its fullest requires meticulous planning. In some cases, to secure the exemption, affirmative allocation to specific assets via a timely filed gift tax return is imperative. In other scenarios, automatic allocation – unless opted out – might occur, potentially resulting in undesirable outcomes if the allocation doesn't align with your preferences.
To avoid costly missteps, it’s a good idea to review each transfer for potential GST tax liability. Additionally, ensuring optimal allocation of your exemption is paramount.
Taxable Transfers:
The GST tax encompasses not only direct gifts to skip persons but also two trust-related scenarios:
- Taxable Terminations: Occur when trust assets transfer to grandchildren upon your child's demise and subsequent trust termination.
- Taxable Distributions: Emerge when trust income or principal is disbursed to a skip person.
Direct gifts within the annual gift tax exclusion (currently $18,000 per recipient or $36,000 for couples making "split" gifts) are exempt from GST tax.
Automatic Allocation Rules:
Automatic allocation rules serve as safeguards against inadvertent loss of GST tax exemptions. For instance, if you make a direct gift exceeding the annual gift tax exclusion to a grandchild or other skip person, any unused GST tax exemption automatically applies to the gift without necessitating an allocation on a gift tax return. Similarly, the exemption is automatically assigned to "GST trusts," typically earmarked for the benefit of grandchildren or other skip persons.
While these rules generally function effectively, they may yield unintended – and potentially costly – outcomes in certain scenarios.
GST Exemption Dynamics:
Although the current lofty GST tax exemption mitigates its impact for many families, prudent planning remains imperative. Post-2025, absent Congressional action, the GST tax exemption will be significantly less.
Understanding and planning for the GST tax is crucial for safeguarding your wealth transfer objectives. Reach out to us with any questions or concerns regarding the GST tax, and let's navigate this intricate terrain together.
HoganTaylor Estate Planning Services
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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