Estate planning often involves carefully thinking about how you’ll distribute your assets to future generations. You might want to leave something for your grandchildren or even younger beneficiaries, but there are taxes to consider. The Generation-Skipping Transfer (GST) tax is a federal tax that applies when you give property or assets directly to much younger beneficiaries, skipping a generation in between. This typically applies to gifts or inheritances left to grandchildren, great-grandchildren, nieces, nephews, or even non-relatives who are at least 37 ½ years younger than you.
The GST tax exists for a reason. In the past, some people structured their estate plans to avoid estate taxes by leaving assets directly to their grandchildren. The GST tax was put in place to ensure that taxes are collected on these transfers to the skip generations. The tax itself is a flat rate equal to the highest estate and gift tax rate, currently 40% in 2024. However, there’s a generous GST tax exemption that applies to lifetime gifts and transfers at death. This exemption amount gets adjusted for inflation periodically.
Understanding the GST tax is important for creating a solid estate plan. There are ways to minimize its impact, such as using trusts or giving assets directly to your children who can then distribute them to your grandchildren. This is where a generation-skipping trust comes in. A generation-skipping trust allows you to set aside assets for your grandchildren or younger beneficiaries while still benefiting your children. The trust can be designed to provide your children with income from the assets while ensuring the principal goes to your grandchildren eventually.
If you’re looking for help exploring generation-skipping transfer and other options, contact Grissom Law, LLC, we can assist you. Our experienced estate planning attorneys will work closely with you to understand your wishes, explore all available strategies, and ensure your estate plan is optimized to minimize the impact of the GST tax while achieving your goals for future generations.
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