As the name implies, generation skipping taxes (GST) apply to gifts and inheritances to grandchildren, great-grandchildren, and unrelated persons who are 37.5 years or more younger than the gifter. The word “skip” applies to the fact that one is skipping immediate children (or immediate next generation). The federal tax amount is quite steep at 35%. Gift givers, not recipients, are responsible for paying the tax, so it is extremely important to preserve wealth by avoiding the generation skipping transfer taxes.
Take Advantage of Lifetime Exemptions
The primary way to avoid generation skipping transfer taxes is to maximize the lifetime exemption provided by law. As of 2018, the exemption is $11.2 million. This is a per person limit, so the amount doubles for married couples. The amount applies through the year 2026, at which point it will revert back to $5.45 million. This temporary increase is a good opportunity for estate planning wealth transfers that minimize tax burdens.
In addition to the lifetime exemption, there is also a yearly exemption for cash gifts. You can gift up to $15,000 per person without generation skipping transfer taxes. Again, the amount doubles for married couples since each spouse can gift that maximum amount to a particular family member.
Which Exemption Applies
We have mentioned two different exemption amounts above, so you’re probably wondering which applies. The answer is, both but separately. Yearly cash gifts under $15,000 are excluded from all taxes, including the lifetime exemption for GST tax. Thus, you can use these two exemptions to truly maximize savings.
Other Taxes to Consider
Although we are discussing generation skipping taxes here, it is important to remember that overall estate taxes apply as well. This includes federal and state estate taxes, each of which have different limits before taxes are applied.
How to Avoid Generation Skipping Transfer Taxes
With so many variables, what is the best way to avoid generation skipping transfer taxes and minimize other potential federal and state taxes? The answer is, prepare an estate plan. No one tax or variable should be considered alone. Your Massachusetts estate planning attorney should take into account all potential taxes and utilize legal instruments that best address them all. By looking at the big picture, you can minimize taxes and maximize your estate value,…preserving your wealth for all of your beneficiaries.