The generation-skipping transfer (GST) tax applies when people give large gifts or inheritances directly to their grandchildren or younger beneficiaries instead of their children. This tax stops wealthy families from avoiding estate taxes by skipping a generation when passing down assets.
How the GST tax works
The GST tax adds an extra charge on top of regular gift or estate taxes. The highest federal estate tax rate, currently 40%, applies to these transfers. However, each person can transfer up to $13.61 million in 2024 before facing the tax. Families with estates under this amount do not need to worry about it.
Who the GST tax affects
The GST tax mainly impacts wealthy families who transfer large amounts of money or property to their grandchildren, great-grandchildren, or younger relatives. It also applies to certain trusts that pass assets down through multiple generations. Families with significant wealth should create a solid estate plan to reduce or eliminate this tax.
Ways to reduce GST tax liability
Families can take steps to lower or avoid the GST tax. One way is to directly pay for a beneficiary’s education or medical expenses since these payments do not count toward taxable transfers. Using dynasty trusts helps pass wealth through multiple generations while maximizing tax exemptions. Spreading out gifts over several years also helps families stay within exemption limits.
Planning ahead with estate planning ensures families find the right strategies to protect their wealth. Understanding the GST tax and taking the right steps can help families pass down their assets without unnecessary tax burdens.