What you need to know about generation-skipping transfer tax
Are you familiar with the generation-skipping transfer tax (GSTT)? Not knowing about this 40% tax might affect your estate plan more than you think. Taking the time to understand the tax and make use of your available generation-skipping tax (GST) exemption can significantly impact your planning.
First let’s start with a cautionary tale. You create a trust for the benefit of your descendants. You anticipate that your child will exhaust the trust, leaving nothing for your grandchildren. You intentionally do not protect the transfers to the trust from the GSTT. The trustee is not aware of your intentions, or the GSTT, and makes $500,000 distribution to your grandchild to help them purchase a home. Now your grandchild is responsible for an unexpected $200,000 tax bill related to the distribution.
Below we answer five important questions to help you better understand the tax and how to plan for it.