The Internal Revenue Code imposes a transfer tax at each family generation. If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent's and the child's estates. If a parent passes the asset directly or indirectly to the grandchild, in order to bypass the child's estate, this transfer avoids estate tax in the estate of the child, but is potentially subject to another transfer tax, known as the generation-skipping transfer (GST) tax. This GST tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent's estate, and is currently assessed at 40 percent. However, the Internal Revenue Code provides each individual with a GST tax exemption. Each individual is allowed a GST tax exemption of $5,490,000 ($10,980,000 for a married couple) for 2017 (adjusted for inflation each year), such that each individual may engage in generation-skipping transfers of up to $5,490,000 without subjecting those assets to the GST tax.
The well-planned use of the GST tax exemption is an important component of the estate plans of high net-worth individuals who want to shelter assets from taxation in successive generations. Ideally, the GST tax exemption is utilized with intervivos (lifetime) gifts, which may take the form of transfers to a trust which would benefit the donor's children during their lifetimes and thereafter pass to grandchildren or more remote issue. Once the gift is made and the GST tax exemption is applied to the trust, the trust remains exempt from further estate or generation-skipping transfer tax for the remainder of the trust's existence. Thus, all post-gift income and appreciation would allude further transfer tax.
If an individual is unwilling or unable to make such a significant lifetime gift, the utilization of the GST tax exemption at death should be considered. For instance, instead of passing all of one’s estate to his or her children, a parent could place the first $5,490,000 of that estate in a generation-skipping trust, of which the children could be beneficiaries during their lifetime, but which ultimately would pass to grandchildren or more remote issue without incurring estate tax in the children's estates.
Please contact Lara M. Sass, PLLC if you would like to learn more about opportunities to utilize your GST tax exemption.