Do I Need to Worry About the Generation-Skipping Transfer Tax?

On Behalf of | Nov 15, 2022 | Estate Planning, Tax Tips |

Many of my clients who are grandparents care deeply for their grandchildren and want to support them as best they can. However, when a grandparent leaves assets to a grandchild, and therefore “skips” over their parents, the generation-skipping transfer tax (GSTT) can apply.

First things first, what is the GSTT?

It is a separate tax from your estate tax, but the GSTT will be applied to transfers you make above the exempt amount in addition to the estate tax. In 2022, the federal exemption increased to $12.06 million.

Unlike passing assets from one generation to the next, where the IRS can collect estate taxes from each generation, by skipping a generation the IRS misses a link in the chain. So, the GSTT is implemented to complete the chain from a tax perspective.

Does Massachusetts tax my transfers too?

Massachusetts will use the value of the gifts you made during your lifetime when calculating your estate tax. While the state does not have an estate tax exemption, there is a filing threshold. Therefore, an estate tax has to be filed if the value of your wealth at the time of your passing and the value of your past gifts exceeds $1 million.

In other words, if the value of your estate is $400,000 at the time of your death, and you gifted $500,000 during your life, your estate would not be required to file a return because the total amount is less than $1 million.

Can I avoid or decrease the amount of tax I pay on a gift?

One common way to decrease your tax liability is to give to your grandchildren during your life instead of after you pass away. While you’re alive, you can give up to $16,000 per person annually without incurring a gift tax.

Another way to help your grandchildren would be to directly cover their costs. For example, if you have a granddaughter in college and you’d like to help her with expenses, you can make direct tuition payments to the school that are usually tax-free.

The generation-skipping transfer tax is complex and can make a big impact on the assets you are able to leave your grandchildren. That’s why many choose to work with an experienced attorney, such as Susana Lannik, of Lannik Law, LLC, who can help guide them every step of the way and ensure they are able to maximize their gifts to the next generation. If you have questions about how the GSTT applies, we’re here to help.