Estate and Tax Planning Basics Part 2 – GSTT
If you are thinking about planning your estate, there are tax considerations that you need to know about. In a previous article, we looked at estate and gift tax and capital gains tax planning. This article will cover the Generation Skipping Transfer Tax (GSTT). A skilled tax planning attorney can help you understand how these taxes apply to you and your estate and can help you minimize your tax liability.
What is the Generation Skipping Transfer Tax?
The GSTT is a tax that is imposed on outright gift transfers or gifts through trust between certain people. GSTT is imposed when the person giving the gift is unrelated and at least 37.5 years older than the beneficiary. It is also imposed on transfers between related people who are at least one generation apart, such as gifts from a grandparent to a grandchild.
Generation Skipping Transfer Tax Exemptions
Similar to the estate and gift tax, each person has a lifetime exemption limit for the GSTT. That means that each person can transfer up to a certain amount of money to someone more than one generation younger than him or her without having to pay the tax. The exemption amount is the same exemption amount as the estate and gift tax exemption. In 2016 this amount is $5.45 million per person.
Why Does the Generation Skipping Transfer Tax Exist?
The GSTT exists to close an estate tax loophole that many people were taking advantage of. Generally when someone dies he or she leaves money to his or her spouse first and then his or her children. Before the GSTT was created in 1976, wealthy people who could afford it would transfer money directly to their grandchildren, thus avoiding one level of estate tax. When the IRS got wind of this they decided to create the GSTT to make sure to collect tax at every level.
How Much is the Generation Skipping Transfer Tax?
In 2016, money subject to the GSTT is taxed at a 40% rate, the same as estate tax.
How to Avoid the Generation Skipping Tax
There are a few legal ways to avoid the GSTT. First, you can give money that would otherwise be subject to the GSTT up to the exemption level. Second, like the gift tax, donors can transfer up to $16,000 a year to each generation skipping person. Finally, you can take advantage of specific rules that allow non-GST taxed transfers, such as the deceased parent rule, which allows generation skipping transfers if the parent that links the generations is deceased.
The Villages Tax Planning Attorneys
As these articles explain, there are many different kinds of taxes that may apply to your estate. In order to make sure that you plan your estate in a way that minimizes taxes you need to work with a knowledgeable tax-planning attorney. Our experienced tax-planning attorneys at Millhorn Elder Law Planning Group, located in the Villages, can help you whether you are concerned about the generation skipping transfer tax or have other tax concerns.