The GST Tax and Your Estate Plan: What You Need to Know

September 28, 2022 HoganTaylor

GST tax

Here’s a not-so-fun fact: The generation-skipping transfer (GST) tax is among the harshest and most complex in the tax code. If you’re planning to share some of your wealth with your grandchildren or great grandchildren, or if your estate plan will benefit them, it’s critical to consider the GST tax.

GST tax explained

The GST tax is a flat, 40% tax on transfers to “skip persons.” This includes grandchildren, family members more than a generation below you, and nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). GST tax applies to gifts or bequests directly to a skip person (a “direct skip”) and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $16,000 per recipient; $32,000 for gifts split by married couples), either outright or to qualifying “direct skip trusts,” are shielded from GST tax.

Why GST tax can be confusing

Even though the GST tax enjoys an annual inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption (currently, $12.06 million), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST tax. In others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

Nonetheless, the automatic allocation rules generally work well, ensuring that your exemption is allocated in the most tax-advantageous manner. As mentioned, in some cases, they can lead to undesirable results. For example, suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. However, the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST tax.

If you wish to make substantial gifts, either outright or in trust, be sure to carefully allocate your GST tax exemption. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

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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