What is a Generation-Skipping Trust (GST)?
A GST is a legally enforceable trust arrangement that transfers assets to the grantor’s grandchildren while “skipping” the next generation, the grantor’s children. Transferring assets to the grantor’s children avoids estate taxes that would apply if the children directly inherited them.
Generation-skipping trusts effectively preserve wealth for individuals with significant assets and savings.
Understanding a Generation-Skipping Trust (GST)
A generation-skipping trust distributes assets from the grantor’s inheritance to grandchildren, preventing their offspring from inheriting them. This permits the grantor to avoid estate taxes if the assets pass to the following generation first.
Generation-skipping transfers don’t have to go to relatives, although grandkids are the most usual recipients. Beneficiaries must be at least 37½ years younger than the grantor, not spouses or ex-spouses.
Generation-skipping trusts can aid the next generation financially by allowing the grantor to provide children access to the trust’s income while retaining the assets for grandchildren.
GST taxation
Changes to the tax legislation in 1986 introduced a generation-skipping transfer tax to address the generation-skipping trust’s potential to escape federal estate taxes. A 2010 Tax Relief Act exemption lowered generation-skipping transfer tax rates from 55% in 2001 to 0% in 2010.
To alleviate tax burdens for those passing small amounts of money to younger generations, the American Taxpayer Relief Act of 2012 granted exemptions. This Act created a permanent $5 million tax exemption on generation-skipping transfers, limiting federal tax to asset transfers over $5 million.
GSTT applies to the rich since the transferred amount is enormous. Due to the high GSTT threshold—$11.4 million per individual in 2019 and $11.7 million in 2021—most people will never pay it.
Amount of 2021 generation-skipping tax exemption.
Raising Generation-Skipping Trust Tax Exemption
Despite generation-skipping transfer taxes, GSTs allow high-net-worth people to transfer money at reduced tax rates. On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act, doubling the generation-skipping tax exemption, making it even more effective.
The Tax Cuts and Jobs Act (TCJA) quadrupled the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples on January 1, 2018, for 2018–2025. The exemption is inflation-indexed. The 40% top tax rate continues.
This legislation expires on January 1, 2026, reverting exemptions to pre-legislation levels unless Congress extends them.
Conclusion
- The GST is a legally enforceable agreement that transfers assets to the grantor’s grandchildren or anybody at least 37 years younger, bypassing the following generation of children.
- The grantor’s offspring avoid estate taxes by not receiving the assets.
- Taxes apply to generation-skipping trusts whose transfers exceed an annually adjusted threshold ($11.7 million in 2021).
