What Is the Generation-Skipping Transfer Tax?

In this month’s newsletter, we provide a comprehensive understanding of the Generation-Skipping Transfer Tax and its implications.

With each transfer of wealth, federal estate taxes are collected. Typically, money goes from spouses to children, then grandchildren, and so on, with taxes collected each time. Wealthy families discovered they could avoid estate taxes by giving money directly to grandchildren and great-grandchildren, skipping a generation. The government responded by creating a Generation-Skipping Transfer (GST) tax in 1976 and 1986 to ensure estate holders taxes paid taxes at each generation. The GST tax rate is currently 40%, the same as the highest estate and gift tax rate. However, individuals have a $13.61 million exemption in 2024 to avoid GST tax on gifts or inheritances. If you have a large estate, your family might need to use this exemption and others to minimize taxes.

Generation-Skipping Transfer Tax

Exceptions to the Generation-Skipping Transfer Tax

If you and your family have a trust made before September 25, 1985, it is grandfathered in and won’t have to follow certain GST tax rules. However, changing or adding to these trusts could cause them to lose this exception. Further, gifts made to skip persons for educational or medical expenses, like Health and Education Exclusion Trusts (HEET), don’t count for GST tax.

Generation-Skipping Transfer Tax Forms

  • Form 709: This form is used when someone wants to give a gift to a skip person while they’re alive. It reports transfers subject to federal gift and certain GST taxes. It also assigns lifetime GST exemption to property transferred during the giver’s lifetime.
  • Form 706-GS(D-1): Trustees report distributions from a trust to a beneficiary subject to the GST tax on this form. 
  • Form 706-GS(D): Skipped persons report tax due on distributions made from a trust to them on this form. 
  • Form 706-GS(T): This form helps your trustee calculate GST taxes and report what is due from certain distributions and terminations subject to the generation-skipping tax.

Expert Estate Planning at Law Stein Anderson

At Law Stein Anderson, we understand the importance of careful estate planning, especially regarding significant gifts or inheritances spanning generations. Our team of seasoned professionals is here to guide you through every step of the process. With our expertise, we’ll craft a tailored strategy that works best for your family. Trust Law Stein Anderson to safeguard your legacy and secure a prosperous future for generations to come.

Check out our latest newsletter, where we further unpack the intricacies of the Generation-Skipping Transfer Tax (GST).