{"id":46370,"date":"2023-01-12T08:36:00","date_gmt":"2023-01-12T08:36:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=46370"},"modified":"2023-02-09T12:33:32","modified_gmt":"2023-02-09T12:33:32","slug":"generation-skipping-trust","status":"publish","type":"post","link":"https:\/\/businessyield.com\/bs-personal-finance\/generation-skipping-trust\/","title":{"rendered":"Generation Skipping Trust: Definition and How It Works","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
Every estate planner must deal with the generation-skipping transfer tax at some point (GSTT). Many practitioners are unwilling to take on the issue since this tax has a reputation for being as dangerous as the water. However, after you remove all the complexities, you’re left with a relatively straightforward set of scenarios to watch. You’ll need a good understanding of the generation-skipping trust and how the tax-transfer exemption work. This article will assist you in identifying and advising clients who are liable for the generation-skipping transfer tax.<\/p>\n\n\n\n
A generation skipping trust is a legally enforceable trust that skips the generation directly below the individual who created it and moves on to the next. Essentially, it bypasses your children and goes straight to their children, your grandkids. The money in this trust is never officially owned by the generation it is skipping; instead, it flows directly to the next generation.<\/p>\n\n\n\n
Blood relation is not required for a generation-skipping trust to function. Anyone who is at least 37.5 years younger than you and is not your spouse or ex-spouse can be named as the beneficiary of a generation-skipping trust. If that person isn’t your grandchild \u2014 a buddy, great-nephew, or niece \u2014 a generation-skipping trust works just as well.<\/p>\n\n\n\n
According to the United States Code, Generation-skipping trust rules establish particular limits for who can be chosen as the “skip person.” According to these rules, the skip person, or beneficiary, must be “a natural person assigned to a generation two or more generations below the transferor’s generation assignment.”<\/p>\n\n\n\n
Generation-skipping trusts allow the settlor to avoid estate taxes imposed if the assets were transferred to the offspring, i.e., the next generation.<\/p>\n\n\n\n
To create a generation-skipping trust, you should think about a few things.<\/p>\n\n\n\n
First, the federal generation-skipping tax (GST) exemption amount raised to $11.4 million in 2019 and $11.58 million in 2020, indexed for inflation. This implies you can claim a lifelong generation-skipping tax exemption up to that amount on the property you transfer.<\/p>\n\n\n\n
Second, no regulation prevents the next generation from obtaining asset earnings as long as the original assets remain in the skip person’s trust.<\/p>\n\n\n\n
Finally, the recipient does not have to be a blood relative. A generation-skipping trust can be named after anyone who is at least 37 12 years younger than you.<\/p>\n\n\n\n
A properly drafted generation-skipping trust will assist the grantor in avoiding numerous rounds of the estate tax in the future, but there are three major types of taxes that affluent persons and estates should consider:<\/p>\n\n\n\n
If an estate’s value exceeds the estate tax exemption, estate taxes must be paid. The federal estate tax is levied on estates worth more than $11.58 million in 2020 (rising to $11.7 million in 2021). The lifetime exemption amount is adjusted annually to account for inflation. Estate taxes are also imposed in 12 states and the District of Columbia. Some state estate tax exemptions are the same as the federal exemption, while others are less than $1 million. States are also free to determine their own tax rates.<\/p>\n\n\n\n
Because it functions in conjunction with the gift tax and the generation-skipping tax, the lifelong estate tax exemption is sometimes known as the unified credit.<\/p>\n\n\n\n
You can donate gifts (money, property, or other assets) without paying taxes during your lifetime as long as the total value of your gifts does not exceed your lifetime exclusion, which is the same as your estate tax exemption: $11.58 million in 2020 and $11.7 million in 2021. There is, however, an annual exclusion of $15,000, and each time you make a gift for more than that amount, your lifetime exclusion (and thus your inheritance tax exemption) is reduced by the excess value of the gift. So, if you’ve given away $5 million in gifts during your lifetime (in excess of the annual restrictions), your estate will owe tax if it’s worth more than $6.58 million if you die in 2020 or $6.7 million if you die in 2021.<\/p>\n\n\n\n
A generation-skipping transfer (GST) tax exists to discourage people from avoiding multiple rounds of the estate tax. The GST tax is levied when someone makes a direct gift of money or other assets to someone who is at least 37.5 years younger than them, even if the donation is made through a trust. The generation-skipping trust tax rate is a flat 40% on transfers that exceed the exemption amount. So, the generation-skipping trust tax exemption is $11.58 million in 2020 ($11.7 million in 2021), which is the same as the estate tax exemption and the lifetime gift tax exclusion, thus most people do not have to pay it. The generation-skipping trust tax is also known as the GSTT or the transfer tax.<\/p>\n\n\n\n
However, if you have a large estate, a properly drafted generation-skipping trust can be a powerful instrument for reducing the tax burden for you, your estate, and your heirs. It is best to consult with a financial advisor or an estate attorney to properly grasp the nuances of this tax and trust.<\/p>\n\n\n\n
Generation-skipping trusts are complex, and the specifics of your trust will be determined by your individual goals. Do you, for example, intend to distribute trust income to people throughout numerous generations? Do you understand how your total estate strategy may impact a surviving spouse?<\/p>\n\n\n\n