The Federal Generation Skipping Transfer Tax or GST
UPDATED: January 18, 2019
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The generation-skipping transfer (GST) tax is a federal tax that was designed by Congress in 1986, to prevent people from being able to avoid paying estate taxe by making gifts or bequests directly to grandchildren or great-granchildren instead of passing them on to each generation. Generally, as property is passed down from generation to generation, an estate tax is imposed on the value of the transfer. For many years, people were able to get around paying this estate tax by instead of transferring their property to their immediate offspring, their children—they would “skip” this generation—and pass it to the following generation, usually their grandchildren/great-grandchildren. Since the transferor skips a generation when making this type of transfer, the transferee in this situation is usually called a “skip-person.” The GST tax is also applied in situations where the transfer is made to a non-relative with at least a 37.5 year age difference. For example, if a 50-year old man, with no children of his own, wanted to transfer the proceeds of a trust to his friend’s child, who was 15 years old, the GST tax would be applied. However, if there is a marriage between two people with a 37.5 year or more age difference, the GST will not apply in property transfers between the couple.
GST Tax Trends and Rates
Before the “Bush tax-cuts” made in 2001, the GST tax rate was 55% for any portion of a transfer of property made to a skip-person valued over $1,000,000. After 2001 however, the GST tax rate went down as the exemption went up. Until 2010, the GST tax was lowered to 35%, and the exemption/exclusion amount was raised to $5,000,000. Then, as part of the Obama administrations Tax-Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the GST tax was taken away completely. However, in 2011, the GST tax returned to the Bush tax-cut levels.
The GST exemption/exclusion amount is inflation-indexed, with a maximum tax rate of 40% beginning 2013. Under the 2017 Tax Cuts and Jobs Act, the base exclusion amount was doubled, but did not take into account the required annual cost of living increases. The inflation-adjusted GST figure is $11.4 million in 2019 (up from $11.18 million in 2018), doubled for a married couple. Under the 2017 Tax Act, beginning 2026, the indexed GST figure will revert to the 2017 levels, which are $5.49 million per individual (or $10.98 for a married couple), the same as the gift and estate tax exemption amount.
Estate Planning and the GST Tax
If you are considering setting up a trust for a grandchild, or want to create a combined trust for your children and grandchildren, you should consult with an estate planning attorney in your area. Setting up a trust properly is the key to getting the maximum GST tax exemption applied, and leaving your heirs with the most that you are able to. If you need assistance in planning your estate, or have additional questions about how the GST tax works, contact a tax or estate planning attorney to set up a consultation.