Question: What is the Generation Skipping Transfer tax?
Answer: Many people are aware of the federal gift tax and the federal estate tax. These are the transfer taxes which are imposed on transfers during life, by gift, or at death. In 2019, a U.S. citizen may transfer assets valued of up to $11,400,000 during his lifetime or, to the extent not used during lifetime, upon his death without paying a gift or estate tax. The third transfer tax, the generation-skipping transfer tax (“GST”), is often overlooked. The applicable exclusion amount for GST purposes in 2019 is also $11,400,000 per U.S. citizen. Unlike the treatment of the gift and estate exclusion, the GST exclusion is a separate tax and could result in significant tax liability in certain circumstances.
In 1976, the Generation-skipping Transfer Tax was created and provided that transfers to beneficiaries more than a generation below the person who transfers that assets would be treated to an additional tax at the highest tax rates. To the extent each generation pays federal transfer taxes, wealthy individuals chose to “skip” generations for transfer tax purposes, and avoid the tax at each generation.
While the GST tax is separate and distinct from the gift and estate tax, if you exhaust your GST exclusion, you will have also exhausted your gift and likely the estate tax exclusion amount. The GST tax rate above the exemption is the maximum estate tax rate – presently 40% and historically as much as 55% – and imposed in addition to gift and estate taxes.
Comment: What does all this mean? Under current law, the applicable exclusion amounts are high, and will not apply to most people. However, the current exclusion amounts are set to sunset in 2026, pursuant to the new tax law. Moreover, if an individual does not take advantage of their GST tax exemption during their life or at their death, it will be lost.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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