What is the Generation Skipping Transfer Tax?

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What Is the Generation Skipping Transfer Tax (GSTT)?

Estate planning can help you pass on assets to your heirs while potentially minimizing taxes. When gifting assets, it’s important to consider when and how the generation-skipping tax transfer (GSTT) may apply. Also called the generation-skipping tax, this federal tax can apply when a grandparent leaves assets to a grandchild while skipping over their parents in the line of inheritance. It can also be triggered when leaving assets to someone who’s at least 37.5 years younger than you. If you’re considering “skipping” any of your heirs when passing on assets, it’s important to understand what that means from a tax perspective and how to fill out the requisite form. A financial advisor can also give you valuable guidance on how best to pass along your estate to your beneficiaries.

The Generation Skipping Transfer (GST) Tax is designed to ensure that a transfer tax is paid at each generational level. In the early days of the federal estate tax, the wealthiest families devised a method to effectively be taxed every other generation. Your parents would leave their estate to your children (instead of you), thereby avoiding tax on their estate upon your death. In turn, you would leave your estate to your grandchildren instead of your children, thereby allowing the transfer to escape estate tax when your children die. This became known as a generation-skipping transfer.

Over time, wealthy clients then began leaving their assets in long term trusts to benefit multiple generations, and thereby escaping taxation at each generational level.

As with the estate and gift tax exemptions, the GST tax exemption is also $5.43 million per person for 2015. However, while the estate tax exemption has been made portable between married couples, the generation skipping transfer tax exemption has not. Thus, special planning is required to take full advantage of the GST opportunities. Please consult with your professional estate-planning advisor on your specific situation.