The Generation Skipping Transfer Tax (“GSTT”) is a tax that is imposed on transfers of assets to beneficiaries who are more than one generation younger than the grantor. This tax is in addition to any gift or estate taxes that may be due on the transfer.
The GSTT was introduced in 1986 as a way to prevent wealthy individuals from avoiding estate taxes by skipping a generation and transferring assets directly to their grandchildren or other younger beneficiaries. The tax is designed to ensure that transfers of wealth are taxed at each generational level, rather than allowing assets to pass from one generation to the next without being subject to taxation.
The GSTT is calculated at a flat rate that is equal to the highest estate tax rate in effect at the time of the transfer. For example, in 2023, the highest estate tax rate is 40%, so the GSTT rate is also 40%. However, there are certain exemptions and exclusions that can be used to reduce or eliminate the GSTT, including:
The GSTT exemption
In 2023, the GSTT exemption is $12.06 million per individual. This means that each person can transfer up to $12.06 million to a grandchild or other younger beneficiary without being subject to the GSTT.
Direct skip exclusion
Transfers of up to $16,000 per year (in 2023) to a grandchild or other younger beneficiary are exempt from both the gift tax and the GSTT.
Marital deduction
Transfers to a spouse are generally exempt from the GSTT, although the assets may be subject to the tax when they are eventually transferred to younger beneficiaries.
The GSTT can be a complex tax, and it’s important to work with an experienced attorney and tax professional to ensure that your estate plan is structured properly to minimize the impact of this tax. Additionally, it’s important to regularly review and update your estate plan to ensure that it reflects changes in your personal and financial circumstances and any changes to tax laws.
Please feel free to contact Burrell Law, P.C. to discuss if you have any questions!
