Benjamin Franklin once said “in this world nothing can be said to be certain, except death and taxes.” In America, death certainly comes with plenty of taxes. While most people are certainly aware of what estate tax is, many people are often unaware that there is another form of tax on inheritance, known as the Generation-Skipping Transfer Tax, or GST.
What is the Generation-Skipping Tax?
The GST is a tax that is applied to gifts and inheritances passed to someone that is at least 37.5 years younger than you, or who is more than one generation below you. It is another tax that can also be applied with gift and estate taxes. The most common instance of this tax is when a grandparent leaves funds, assets, or trusts to a grandchild. Due to the age restrictions on this tax, this can also affect children of older parents, or inheritances from an older aunt or uncle. An individual who is receiving an inheritance or gift that would be subject to this tax is referred to as a skip person.
Generation Adjustments
There is a “Generation Adjustment” that can be made under a certain condition. This causes the Generation-Skipping tax to not apply to a skip person. The main reason for this to occur is where the grandchild’s parents are both deceased, so they are “adjusted up” to their parent’s level.
Generation-Skipping Transfers
There are 3 types of transfers in which the tax is applied. The first is called a “Direct Skip.” This is where funds or assets are transferred directly to the skip person, via a gift or inheritance.
The next 2 are both forms of “Indirect Skips.” The first of which, called a Taxable Distribution, refers to the distribution of funds or property to a skip person via a trust, which is not subject to estate or gift taxes. If a grandparent establishes a trust for a grandchild, payments made out of the trust will be subject to the GST.
The second Indirect Skip is called Taxable Termination. This is where a trust is established for a non-skip person; and upon their death, it is transferred to an individual who would be considered a skip person from the original party. This is most often applied where a parent establishes a trust for their child, who then passes away; and their child now begins to collect from that same trust.
Exclusions and Exemptions
There are annual exclusions and lifetime exemptions for the GST. If you establish an estate transfer or trust in your estate plan where the GST may apply, your loved one may not have to lose assets to this tax. Your estate planning attorney will help you find these exemptions and exclusions where they apply. The annual exclusion for GST is similar to the exclusion on gift taxes. This means that per beneficiary, per year, the first $15,000 that would be subject to the GST is exempt from it. This can be split amongst spouses, so that each grandparent could give $15,000 to each grandchild; without being subject to the gift tax or generation-skipping tax.
For more than 40 years, our firm has been assisting people like you with long term care and estate planning needs. We bring you the knowledge and resources to protect you and your family. Armstrong & Lamberti, PLLC does not provide tax, legal, or accounting advice by articles. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Call 718.477.7700 or contact us online to schedule a free initial consultation with an estate planning attorney at Armstrong & Lamberti, PLLC. We proudly serve Staten Island, Brooklyn and the other boroughs of New York City.