You know about the estate tax. You’ve definitely heard of the gift tax. But how much do you know about the generation-skipping transfer tax (GSTT)?
WHAT IS THE GSTT?
The generation-skipping transfer tax (GSTT) is a transfer tax akin to the gift and estate tax. However, the GSTT specifically targets transfers made by gift or inheritance to beneficiaries considered “skip persons.” A skip person is someone who is at least two generations below you.
For example, a grandchild is a common skip person because you’re skipping over your child and transferring assets directly to your grandchild.
Here’s an example: You write a $30,000 check to your grandson for a down payment on a house. Bypassing your own child allows you to avoid potential gift tax that would have been applied if the gift had passed from you to your child and then from your child to your grandchild. However, such a transfer is still subject to the GSTT as it involves a skip person.
LIMITS
In 2023, a taxpayer can gift up to $17,000 to a recipient without incurring any tax obligations. And the combined estate and gift tax exemption is $12.92 million. It is worth noting that the GSTT only applies to the value of the taxpayer’s estate at death, that is, over this exemption amount. The donor’s estate is responsible for any GSTT due.
THE BACKGROUND
The GSTT was first introduced in the United States in 1976 and has since undergone several revisions, with the most recent changes occurring in 2017 as part of the Tax Cuts and Jobs Act.
THE FUTURE
The provisions relating to the GSTT exemption in the current tax law will sunset at the end of 2025. This means that as of January 1, 2026, the GSTT exemption will revert to the amount allowed under the law effective in 2017 (an inflation-adjusted $5 million, or about half of what is currently allowed). Therefore, if you are considering taking advantage of the higher current exemption amounts, the time to do so is limited unless Congress acts to change the law again.
The GSTT is a complex and often misunderstood area of tax law. But understanding the rules, regulations, and implications of the GSTT is vital for individuals who wish to transfer assets to future generations while minimizing their tax liability. Boris Benic and Associates can help you determine if and how to implement GSTT exemptions as part of your estate plan.