Generation-Skipping Transfer Trusts Allow You to Pass Down Your Wealth in a Tax-Efficient Way
The new tax law, passed in late December, temporarily raised the lifetime exclusion for estate, gift and generation-skipping taxes to just over $11 million per person. The higher exemption, which adjusts for inflation while in effect, sunsets at the end of 2025.
That means, for the next eight years, each person can gift or transfer up to $11.2 million without having to pay federal gift or estate taxes. That amount doubles for couples and can be combined with the annual gift exclusion, which allows you to give $15,000 in 2018 to any number of people without reducing your federal lifetime gift tax exemption.
In effect, federal estate taxes will be rendered moot for all but the wealthiest of Americans. But the tax is steep on the amount that exceeds the limit: 40 percent. Note that the generation-skipping transfer (GST) tax, imposed at a 40 percent flat rate, is in addition to gift or estate tax, depending on whether the transfer is made during life or at death.
Of course, when it comes to financial planning, taxes should take the backburner to achieving your goals, but they should be considered—especially now that you have an opportunity to transfer more wealth to your family through existing or newly formed irrevocable trusts, including generation-skipping trusts.
Skipping Generations for a Reason, or Three
One strategy is the generation-skipping trust, which bypasses your immediate children in order to benefit your grandchildren even more down the line. There are three key reasons to do so:
- This helps protect significant family wealth from substantial future tax liability. This is especially beneficial if your children are financially comfortable, and you want to provide for your grandchildren or even your great-grandchildren. Your children can benefit from the income generated by the assets in the trust, but they don’t own the assets in the trust and can be given no access to the trust principal or limited access at the trustee’s discretion, depending on your objectives. The underlying assets will transfer tax-free to the generation after.
- You can fund a generation-skipping trust with up to $11.2 million, allocating your lifetime exemption and your GST exemption to the trust to avoid gift tax as well as future GST tax liability.
- Once the exemption is applied, future appreciation of the trust assets is allocated to the trust beneficiaries directly. If the trust is irrevocable, your family won’t have to pay GST tax even if the trust assets appreciate considerably after your gift is complete.
Estate and tax planning is complicated; layering on temporary rules that may or may not be made permanent dials up the complexity when it comes to navigating federal estate, gift and generation-skipping transfer taxes as well as state estate or inheritance taxes. You’ll want expert guides—your advisor, accountant and lawyer come to mind—to help you take maximum advantage of the generation-skipping transfer tax lifetime exemption.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Raymond James does not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional
W. Dale Crossley, JD, Financial Planner
Evan M. Shear, CFP®, CERTIFIED FINANCIAL PLANNER™
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