What About Generation-Skipping Trusts And Transfer Tax Advantages?
Generation-Skipping Trust
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Generation-Skipping Trust and Its Uses.
Generation-Skipping Trust (GST). What Is a Generation-Skipping Trust (GST)?
A generation-skipping trust (GST) is a legally binding trust agreement. The contributed assets are passed down to the grantor’s grandchildren, thus “skipping” the grantor’s children’s next generation. Bypassing over the grantor’s children, the assets avoid the estate taxes—taxes on an individual’s property upon their death—that would apply if the children inherited them. What About Generation-Skipping Trusts And Transfer Tax Advantages? A Generation-Skipping Trust Is Used To Transfer Money Or Other Assets To Someone Who Is At Least 37.5 Years Younger Than You.
Generation-skipping trusts are practical wealth-preservation tools for individuals with significant assets and savings.
If you’re thinking about creating a generation-skipping trust, you need to consider a few points.
First, the federal generation-skipping tax (GST) exemption amount, indexed for inflation, increased to $11.4 million in 2019 and $11.58 million in 2020. This means you are allowed a lifetime generation-skipping tax exemption up to that amount against a property you transfer.
Second, no rule prohibits the next generation from accessing earnings on assets as long as the original assets remain in the trust of the skip person.
Lastly, the beneficiary does not have to be a blood relative. You can designate anyone at least 37 ½ years younger than you as the beneficiary of a generation-skipping trust.
A generation-skipping trust (GST) is a legally binding agreement in which assets are passed down to the grantor’s grandchildren—or anyone at least 37½ years younger—bypassing the next generation of the grantor’s children.
By skipping the opportunity to receive the assets, the grantor’s children avoid the estate taxes that would otherwise be due.
Generation-skipping trusts are liable for taxation if the amount transferred exceeds a certain annually adjusted threshold ($11.7 million in 2021).
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Understanding a Generation-Skipping Trust (GST)
Because a generation-skipping trust transfers assets from the grantor’s estate to grandchildren, the grantor’s children never take title to the assets. This allows the grantor to avoid the estate taxes that would apply if the assets came into the possession of the next generation first.
Though grandchildren are the most common beneficiaries, the recipient of a generation-skipping transfer doesn’t necessarily have to be a family member. The beneficiary can be anybody at least 37½ years younger than the grantor and not a spouse or ex-spouse.
Taxing the Generation-Skipping Transfer Trust (GST)
Due to the generation-skipping trust’s viability as a loophole to avoid federal estate taxes, changes were made to the tax code in 1986 that created a generation-skipping transfer tax. Generation-skipping transfer tax rates have risen and fallen over the years, with a recent high of 55% in 2001 and a low of 0% in 2010—due to an exemption awarded by the 2010 Tax Relief Act.
Intended to ensure that people transferring modest sums of wealth to younger generations don’t have to bear the brunt of the tax burden, these exemptions were secured by the American Taxpayer Relief Act of 2012. This legislation established a permanent $5 million tax exemption on generation-skipping transfers. The federal tax on a generation-skipping transfer of wealth would apply only if the amount exceeded $5 million.
However, the GSTT truly applies to the very wealthy because the transferred amount is astronomical. Most people will never encounter the GSTT because of the high threshold: the tax only applies when the transferred amount exceeds $11.4 million per individual (for 2019), and in 2021 is $11.7 million.
Increasing the Generation-Skipping Trust Tax Exemption
Even with the installment of taxes on generation-skipping transfers, GSTs still serve as tools for high-net-worth individuals to transfer wealth at a lower tax rate. And they became even sharper tools on Dec. 22, 2017, when President Donald Trump signed the Tax Cuts and Jobs Act, which doubled the generation-skipping tax exemption.
Starting on Jan. 1, 2018, the Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption to $11.2 million for singles and $22.4 million for married couples, but only for 2018 through 2025. The exemption level is indexed for inflation. The 40% top tax rate remains in place.
This act expires on Jan. 1, 2026, pushing the exemptions back to their pre-Act amounts unless Congress extends them.
Filing Requirements for California Generation-Skipping Transfer Tax Return for Terminations
According to Revenue and Taxation Code section 16720, every person required to file a federal generation-skipping transfer tax return, IRS Form 706-GS(D) or Form 706-GS(T) is required to file a California Generation-Skipping Transfer Tax Return, GST(D) or GST(T), with the State Controller’s Office. (For information on filing requirements for the federal generation-skipping transfer tax return, you may view the IRS Instructions for Form 706-GS(D) or Instructions for Form 706GS(T).)
The California Generation-Skipping Transfer Tax Return is due and payable on or after Jan. 1, but not later than Apr. 15, following the calendar year when the distributions were made or the terminations occurred. The California return must include a complete copy of the federal generation-skipping transfer tax return and all related schedules.
Gift Tax
The 2019 gift tax was $11.4 million per individual. Therefore, you and your spouse would be able to gift $11.4 million each over your lifetime. The Tax Cuts and Jobs Act of 2017 have increased the annual lifetime gift tax exemption through 2025. In 2020, the gift tax increased to $11.58 million per individual. Consult a tax professional to determine the most tax-efficient way to gift your possessions.
Filing Requirements for California Generation-Skipping Transfer Tax Return for Terminations
According to Revenue and Taxation Code section 16720, every person required to file a federal generation-skipping transfer tax return, IRS Form 706-GS(D) or Form 706-GS(T) is required to file a California Generation-Skipping Transfer Tax Return, GST(D) or GST(T), with the State Controller’s Office. (For information on filing requirements for the federal generation-skipping transfer tax return, you may view the IRS Instructions for Form 706-GS(D) or Instructions for Form 706GS(T).)
The California Generation-Skipping Transfer Tax Return is due and payable on or after Jan. 1, but not later than Apr. 15, following the calendar year when the distributions were made or the terminations occurred. The California return must include a complete copy of the federal generation-skipping transfer tax return and all related schedules.