Tax Advantages of a Generation Skipping Trust (GST)

A Generation Skipping Trust (GST) is an estate planning tool used to transfer assets to grandchildren, great-grandchildren, or non-related individuals who are at least 37.5 years younger than the grantor. This helps avoid the estate tax that might be assessed if assets were passed down through the generations.

Purpose and Goals

The main purpose of a GST is to reduce or eliminate estate taxes that could be incurred if assets were transferred to the next generation or the grantor’s children. By skipping a generation, the assets avoid double taxation that may occur when they are passed to the children and then to the grandchildren.

Beneficiaries and Distributions

The beneficiaries of a GST are the “skip persons,” typically individuals two generations younger than the grantor. However, the trust can be designed to provide distributions or income to the children (the non-skip generation) without including them as the primary beneficiaries. This allows them to benefit from the trust without directly receiving the principal, potentially avoiding estate tax at their passing.

GST Transfer Tax Exemption

The IRS allows for a GST transfer tax exemption, permitting a certain amount of assets ($13.6 million in 2024 per person) to be transferred without incurring the generation-skipping transfer tax. This federal tax, with a rate of 40%, is triggered when an outright transfer to a skip person occurs, property held in trust terminates and transfers to a skip person, or distributions are made from a trust to a skip person.

Future Considerations

Currently, the exemption is high for estate tax and the GST exemption, but these amounts are set to expire at the end of 2025, potentially lowering to around $6 million per person, adjusted for inflation.

Growth Potential and Considerations

Assets placed in a GST can grow and appreciate over time, as they are not subject to estate tax at every generational level, allowing for potential compound growth. However, these trusts are complex and costly to set up and maintain. They may pay higher annual income tax, as trust tax rates reach the highest bracket quickly. Additionally, they are generally irrevocable.

Importance of Professional Guidance

Given the complexity and potential costs, it’s crucial to work with a group of professionals to evaluate, establish, and maintain a GST. This ensures the trust is set up correctly and aligns with the grantor’s estate planning goals.

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