What is Generation-Skipping Transfer Tax?
Estates are subject to taxes when they pass down to subsequent generations after the owner’s demise. With each generational wealth transfer, the government collects an estate tax on the property. Taxes can significantly decrease the amount of assets transferable to the next generation.
Fortunately, the legal framework makes it possible to minimize these taxes. The strategy is generation-skipping, in which you can pass down wealth directly to grandchildren and great-grandchildren. Estate planning attorneys in California explain that employing this strategy shields an inheritance from being subjected to estate taxes twice.
How Does the Generation-Skipping Transfer Tax Work?
The government established legislation to attempt to eliminate the transfer tax advantage of skipping a generation by imposing taxes when a generation is skipped. The law ensures large estates still pay taxes during transfer between every generation. The rate is currently 40%, which can significantly burden high-net-worth individuals.
However, the law exempts estates exceeding $13.61 million in 2024. You can leverage this exemption when you want to give away some assets as gifts or leave an inheritance subject to the generation-skipping transfer tax. Skilled California generation-skipping trust lawyers can provide legal insights on the most suitable strategies.
Other key considerations to keep in mind about the generation-skipping transfer tax are:
- The exemption amount per individual is doubled if you’re married, meaning you could transfer up to $27.22 million without incurring tax
- The tax doesn’t apply to qualified nontaxable gifts you make to your beneficiaries while you’re still alive. You can gift your beneficiaries up to $15,000 per year to your beneficiaries, besides payments for medical care, tuition, or medical insurance.
Who Are the Parties Involved in Generation-Skipping Wealth Transfer?
- The parties to a generation-skipping wealth transfer are the following:
- The transferor: The person making the wealth transfer
- The skip person: The individual receiving the wealth transfer must be at least two or more generations away from the transferor or at least 37.5 years younger than the transferor. In some cases, the skip person can be a trust
- The non-skip or skipped person: The person who is in the generation between the transferor and the skip person.
What Tools Can I Use to Minimize Generation-Skipping Transfer Taxes?
If you have a substantial estate and want to make sizeable contributions to the skip person, it’s advisable to work with generation-skipping trust attorneys. They can evaluate your case and help you explore options to maximize your gift while minimizing tax consequences. It also helps to start early to enhance the chances of a favorable outcome.
Estate planning professionals can help you align your legal and tax planning strategies. One approach would be establishing a Generation-Skipping Trust (GST) to pass your wealth to skip individuals.
How a Generation-Skipping Trust Works
A GST sidesteps estate taxes that generally apply when assets move from generation to generation. The tool stands apart from other types of trusts in its ability to minimize estate taxes while optimizing generational wealth transfer.
Effective establishment of a GST can financially secure your grandchildren’s future and bridge the gap between your financial stability and the prosperity of future generations. The wealth you transfer to a GST continues to grow tax-free over the years, dramatically reducing your estate’s overall tax liabilities.
Benefits of Creating a Generation-Skipping Trust
Apart from the tax advantage of a generation-skipping trust, you can enjoy several other benefits once you establish it.:
- Control over asset distribution: With a GST, you can specify how the assets will be transferred and divided among the beneficiaries to honor your wishes. This level of control can help you protect your assets while ensuring they are used how you intend.
- Wealth protection across generations: A GST can help you preserve wealth by skipping a generation or two before transfer. The move shields the assets from being diluted by taxes during each transfer, saving a considerable portion for future generations.
- Providing for the future: A GST enables you to provide for your descendant’s education, healthcare, and other needs in a practical, effective, and well-structured manner.
Despite the benefits of a GST, it has some drawdowns that would require the input of skilled generation-skipping trust attorneys to navigate. For example, they can be complex to establish and manage, given the intricate legal framework and regulations.
The trusts can be subject to generation-skipping transfer taxes if they are over the annual exclusion limit. Additionally, they require significant ongoing management expenses, which can diminish the assets’ value over time. Your lawyers can help you evaluate these considerations carefully to make an informed decision.
When is a Generation-Skipping Trust a Viable Option?
Deciding whether to establish a GST to minimize the impact of generation-skipping transfer taxes depends on your unique financial and family situation. For example, your children could be wealthy and financially dependent that they don’t require an inheritance.
You could also establish a GST because you want to bypass the immediate generation to protect your grandchildren’s future. A GST can enable you to allocate adequate resources to cater to needs such as education or medical expenses.
A Skilled Generation- Skipping Trust Attorney Helping You Navigate Generation-Skipping Taxes
The generation-skipping transfer tax has a long history and can be complex from case to case. With the ever-changing laws and policies, knowing what the future may look like concerning anticipated changes to the exemption limits may be challenging. Fortunately, skilled estate planning attorneys in California can help you navigate the intricacies.
At The Singh Law Firm, we understand that estate planning laws can be complex, so we dedicate ourselves to helping clients understand how they apply in specific situations. If you have concerns about generation-skipping transfer tax and how to minimize its implication on your estate, our generation-skipping trust lawyers can help. Call us at 510-742-9500 for a FREE consultation.
