Key takeaways
The generation-skipping transfer (GST) tax is separate from the estate tax; it applies when you transfer assets to recipients two or more generations below you.
You may want to consider taking advantage of the lifetime exemption from the GST tax, which may be applied to any combination of transfers during your life or made at the time of death.
Transfer strategies include generation-skipping transfers and a direct generation skip, both of which may involve placing assets in a trust.
Estate taxes can be hefty. One strategy to reduce estate taxes in your family over time is to “skip” a generation of heirs. While this strategy can be successful, it’s not necessarily tax-free.
The generation-skipping transfer (GST) tax, also referred to as the generation-skipping tax, is assessed on transfers that are designed to otherwise avoid estate tax. However, there are exemptions and exclusions to the GST, which may create long-term wealth-building opportunities.
The lifetime exemption from the GST tax offers some advantages. It may be applied to any combination of transfers during your life or made at the time of death.
GST rules apply to asset transfers to recipients, usually grandchildren, who are two or more generations younger than you. Transfers to your own children are not considered generation-skipping. Assets transferred to a grandchild whose parent (your child) is deceased are not subject to the GST tax.
The GST tax is separate from, and in addition to, the estate tax. The tax is currently calculated at a flat rate of 40% (equal to the estate and gift tax rate) on transfers above the lifetime GST tax exemption amount ($13.61 million per individual in 2024). The exemption amount will grow each year based on inflation through 2025. The exemption amount is set to revert to around $7 million in 2026, indexed for inflation.
The GST tax rate applies to outright transfers of property and certain other transfers of property to a trust. Generally, trust income or principal distributed to grandchildren are subject to GST.
The lifetime exemption from the GST tax offers some advantages. It may be applied to any combination of transfers during your life or made at the time of death.
Here are two potential strategies to consider when using the lifetime exemption. Discuss these strategies with your tax and legal advisors to determine which is best suited to your situation.
The federal estate, gift and GST tax exemptions are unified and indexed for inflation in future years. There is one important difference, however. With an estate tax, the unused exemption of the first spouse to die can be added to the surviving spouse’s personal exemption. The same flexibility does not apply to the GST exemption. Any of the GST exemption unused at your death is lost.
The GST tax does not apply to qualified nontaxable gifts. These include, but are not limited to:
Gifts made for the benefit of a grandchild in these forms are generally tax-free.
You have the flexibility to make generation-skipping transfers during your lifetime or to plan for them to occur after your death.
During your lifetime, all applicable transfers of wealth that you make are automatically applied to your lifetime GST tax exemption, unless you elect otherwise. For transfers at death, the exemption may be allocated as you direct in your will or as your executor directs if unspecified in your will.
The rates and rules for generation-skipping taxes can be complicated and subject to change. Work with your tax, legal and financial professionals to determine if and how to implement GST tax exemptions as part of your estate plan.
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