What is the Generation Skipping Transfer Tax?

Unfortunately, estate and gift taxes are not the only mechanisms of federal taxation when it comes to the transfer of wealth. In addition to taxing lifetime and testamentary transfers above the applicable exemption amount, the government may assess an additional tax upon certain transfers. The Generation Skipping Transfer Tax (or GSTT) addresses transfers that might have otherwise avoided estate or gift taxes. It applies to transfers made to individuals two or more generations below the donee (for example, a transfer from a grandparent to grandchild), and is imposed at the highest federal estate tax rate.

To understand the GSTT, take the example of a wealthy decedent who has created a trust in his Will giving a life estate in the trust property to his child, and remainder to his grandchildren. Even though the child receives the benefit of the trust property during the child’s life, the property wouldn’t be subject to estate tax in the estate of the child. Without the GSTT, the property would reach the grandchild without a wealth transfer tax at the child’s level. But the government stepped in to avoid this result by imposing the equivalent of an estate tax on the trust property at the time the child’s interest terminates at death and passes on to the grandchildren.

Scenarios where the GSTT often comes in to play are: in the shifting of interests in a multigenerational trust when the interests of older generations lapse (like the above example); an outright lifetime gift to a grandchild; a testamentary bequest to a grandchild; or a gift to a trust for the benefit of a grandchild.

Just as with the estate tax, however, each individual is allowed a GSTT exemption. Thus thankfully—again, just as with estate taxes—the GSTT will not be a principal concern for many who undertake estate planning. For those for whom the GSTT will or might be a factor, it is important to keep in mind that planning options are available. The experienced Houston Estate Planning attorneys at Garg & Associates are available to guide you in constructing an estate plan that will pass your assets on to future generations with the government taking as little a portion by way of taxation as possible.

To discuss your GSTT planning options or to answer any questions you may have with regard to federal wealth transfer taxes, we invite you to contact us for a consultation. Call Garg & Associates, PC at 281-362-2865 or complete our contact form.

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Garg & Associates, PC | 21 Waterway Avenue, Suite 300 | The Woodlands, Texas 77380 Please call 281-362-2865 | Fax: 866-743-4506
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