The generation skipping tax (GST) is a federal tax that applies when someone transfers assets directly to a beneficiary who is at least two generations younger, such as a grandchild. This tax aims to prevent wealthy families from avoiding estate taxes by skipping an entire generation.
How the GST impacts estate planning
The GST can impose significant tax liabilities on high-asset families if they transfer assets directly to grandchildren or unrelated individuals who are 37.5 years or more younger. The tax applies on top of regular estate or gift taxes, potentially reducing the value of the transfer. However, careful planning can help families minimize or avoid GST liability while preserving wealth for future generations.
Leveraging the GST exemption
The Internal Revenue Code provides an exemption amount for the GST, which allows individuals to transfer a specified amount of assets without triggering the tax. In 2024, the GST exemption is $12.92 million per person, or $25.84 million for married couples. Families can use this exemption strategically by placing exempted assets into a generation-skipping trust, which protects the wealth for future generations while avoiding additional tax burdens.
Benefits of generation skipping trusts
A generation skipping trust can shield assets from estate taxes at each generational level. When structured correctly, the trust ensures that assets pass directly to grandchildren or later generations without incurring estate taxes in the child’s estate. This strategy can preserve more wealth for heirs while providing a measure of asset protection.
Estate planning for high-asset families often involves complex strategies to optimize tax efficiency and preserve wealth. Working with an experienced estate planning attorney is essential to navigate the rules surrounding the GST and craft a plan tailored to a family’s unique financial goals. By leveraging legal tools such as the GST exemption and generation-skipping trusts, families can ensure their legacies endure across generations.