Generation Skipping Trust (GST) Exemption

On Behalf of | Mar 7, 2023 | Estate Planning, Trusts |

A Generation Skipping Trust (GST) is a fiduciary arrangement that is used to pass down assets and property to a later generation.

A GST tax is imposed on transfers to grandchildren and more remote descendants that exceed the exemption limits ($12,060,000).  The rationale behind this is so that transferors cannot avoid transfer taxes on the next generation by skipping a generation.

It is important to understand that a GST tax is separate from an estate tax.  Federally, the GST tax is 40% over an exemption limit of $12,060,000 (2022).  Estate tax exemption is the same amount, but left-over exemption on the death of one spouse could be credited to the surviving spouse.  This is not the case with the GST exemption.  This could change if the federal government decided to lower the amount as it will on the Estate Tax Exemption which is the same amount ($12,060,000).

This tax may be imposed in three ways:

  1. There is an outright gift made to a skip person. In most cases a grandchild and in some another favored person.
  2. An interest in a trust terminates and there remain no more non skip people. Example all of your kids die and your grandchildren get the funds.
  3. All of your kids die, leaving only skip people.

It is important to note that the GST is not applicable to the $16,000 annual gifts; payments directly to institutions for tuition; and medical care paid directly to providers.

The GST exemption essentially allows earmarking of transfers made during life time or a death the either skip a generation or are made in trust for multiple generations.  As described above certain gifts are not applied toward the exemption: Example the $16,000 annual exclusion.

GST Strategies:

  1. Assets you transfer to a trust utilizing the GST exemption: Example kid for life with remainder to grandchildren.
  2. Assets transferred at death $12.6 M to kids for life, and on their death it goes to their grandchildren with GST Exemption.

Once can plan ahead to avoid unnecessary GST tax. In life, all applicable transfers are automatically applied to your lifetime GST exemption.