The Generation-Skipping Transfer Tax (GSTT) is a federal tax in the United States. It applies when you transfer substantial assets through an estate plan to someone more than one generation younger than you, like a grandchild.
The GSTT is in place to prevent wealthy families, possibly like your own, from bypassing the estate and gift taxes that would generally apply if you transfer assets to your children, the next immediate generation.
Is the GSTT applicable to your assets?
The GSTT is a federal tax in the United States, not a state tax. This means it applies regardless of where you reside in the U.S., including Texas. You might be subject to the GSTT under certain conditions. For instance, if you transfer assets to someone significantly younger than you — at least 37.5 years younger, to be precise — you could trigger the GSTT. This rule holds whether or not you’re related to them. The GSTT applies immediately if you make a gift or estate transfer to a “skip person,” such as a grandchild or anyone at least 37.5 years younger than you.
Trusts are no exception
Trusts are no exception when it comes to the GSTT. If you establish a trust for the benefit of skip persons — those more than one generation below you — you might need to consider the potential GSTT implications. The distributions from such a trust could be subject to the tax. For instance, establishing a “dynasty trust” intended to benefit multiple generations, such as your children, grandchildren, and great-grandchildren, could trigger the GSTT. This is because the tax may apply to transfers of trust assets to descendants who are more than one generation below you.
Understanding the nuances of the GSTT is an essential part of estate planning. However, if not handled correctly, it could lead to significant tax implications that might erode the value of the assets you wish to pass on. This is why planning for the GSTT is crucial if you want to leave some of your assets to your grandchildren or other younger relatives and minimize its impact.