Exemption From Generation-Skipping Transfer Taxes
How the tax works and how to avoid it.
The generation-skipping tax, also called the GST or generation-skipping transfer tax, can be incurred when grandparents do pretty much what it sounds like -- they directly transfer a certain amount of money or property to their grandchildren without first leaving it to their parents. The parent's generation is skipped to avoid an inheritance being subject to estate taxes twice: once when moving from the grandparents to their children, then from those children to their children.
The Internal Revenue Code applies another tax to these inheritances instead -- the generation-skipping tax -- to compensate for the estate taxes that may be avoided.
The Generation-Skipping Tax Exemption
An exemption is the amount that can be directly transferred to grandchildren or into a generation-skipping trust for the benefit of grandchildren without incurring a federal generation-skipping transfer tax. The generation-skipping transfer tax does not just apply to grandchildren or other family members. It also addresses gifts or transfers made to unrelated individuals who are at least 37 1/2 years younger than the donor.
How Much Is the Generation-Skipping Tax Exemption?
Under the provisions of the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010, the federal generation-skipping transfer tax was repealed for 2010. It came back in 2011, however. At that time, the exemption was $5 million.
Any gifts made over this amount were subject to a 35-percent tax rate.
The federal generation-skipping transfer tax exemption increased to $5.12 million in 2012, and the tax rate remained steady. Then came the American Taxpayer Relief Act in 2013.
Under the terms of ATRA, the GST tax exemption increased to $5.25 million.
The GST tax rate jumped to 40 percent. ATRA also indexed the exemption for inflation, so it has subsequently increased from year to year. The 2014 generation-skipping transfer tax exemption went up to $5.34 million, and as of 2017, it's set at $5.45 million. The GST tax rate remains at 40 percent.
Married couples can double these exemption amounts, resulting in a significant amount of property that can be transferred without taxation. The average taxpayer will most likely never have to worry about these rules. Those for whom they are a concern should speak to an estate planning attorney for guidance as to how to set up their estates for maximum protection.
For historical federal generation-skipping transfer tax exemption amounts, refer to Chart Showing Federal Generation-Skipping Transfer Tax Exemption: 1997 - 2015.
State-Level GST Taxes
Many states that collect state estate taxes also collect state generation-skipping transfer taxes. Check with your state taxing authority, your accountant or your estate planning attorney to learn the rules in your location.
NOTE: State and local laws change frequently, and the above information may not reflect the most recent changes. Please consult with an accountant or an attorney for current tax or legal advice.
The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.