You’ve likely heard of estate and gift taxes, but there’s another tax called the generation-skipping transfer (GST) tax that ultra-wealthy families should know about. This tax shapes how wealth passes down through generations and can significantly impact your family’s financial plans.
The Creation of GST Tax
The GST tax was created because some wealthy families were avoiding estate taxes by passing money directly to grandchildren and great-grandchildren, skipping their children. This meant they could pass on more wealth without paying taxes. To fix this, the government introduced the GST tax in 1976 and updated it in 1986, making sure large estates still paid taxes at each generation.
Currently, the GST tax rate is 40 percent, which can be a hefty burden for wealthy individuals. However, there’s a silver lining: a GST exemption of $13.61 million for individuals in 2024, meaning you can give gifts or inheritances up to this amount without paying GST tax.
Three main parties play roles in a generation-skipping wealth transfer:
- The transfer-or: the person giving money or property to someone else.
- The skip person: the one receiving the money or property, who is at least two generations younger than the transfer-or.
- The non-skip person: the generation in between the transfer-or and the skip person.
If you have a large estate and want to give significant gifts to skip persons, it’s crucial to work with experienced professionals. Minimizing tax consequences and maximizing your gift’s impact could you lead you in the right direction. Starting early and collaborating with trusted advisors is key. Your estate plan will need regular updates to adapt to changing circumstances.
It’s important to seek comprehensive advice that considers legal, financial, and tax aspects when creating your estate plan. By working with a team of experts, you can ensure the best outcomes for you, your loved ones, and your wealth.
