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What is generation-skipping transfer tax?

On Behalf of | Jul 9, 2020 | Estate planning, Tax Law |

There are many taxes associated with estate distributions, depending on the specific situation. Proper estate planning crucial when it comes to easing the tax burden for your beneficiaries. There is nothing worse than leaving your heirs a huge tax bill that all but wipes out their inheritance.

Keep reading for more information regarding generation-skipping transfer taxes and how they apply.

Closing the loophole on tax-free transfers

Before 1976, affluent people could legally transfer their assets to their grandchildren and avoid estate taxes altogether. According to Investopedia, the generation-skipping transfer tax (GSTT)effectively closed that loophole by imposing a tax on large inheritances that skip a generation.

This federal tax affects beneficiaries that are at least 37 1/2 years younger than you.

When the GSTT is applicable

This law only affects the beneficiaries of people who have very large estates. According to data from 2019, the transfer must exceed $11.4 million per person before the GSST tax will apply. Once that threshold applies, however, it is a heft 40% of the amount beyond $11.4 million.

Common GSTT strategies

While most people are not affected by GSTT regulations due to the large exemption amount, here are ways to work around them if you have a large estate. For example, you could gift a portion of your estate to your beneficiary while you are alive. If you gift a family member more than the allotted amount per year, however, you may see gift taxes instead.

Additionally, you may set up a special kind of trust to minimize the tax burden. These are dynasty trusts used to make predetermined distributions to multiple generations of family.