What Is The GST Tax?
Many people are familiar with income and estate taxes but not many know what the generation skipping transfer (GST) tax is or how it can impact the monies you leave your heirs. The GST tax is imposed on monies you leave directly to grandchildren or to trusts that will ultimately benefit them. Think of it like this:
· Income tax is a tax on the income you earn during the year. You pay it every year so long as you have income.
· Estate tax is a one-time tax that is due nine months after someone dies if the estate assets meet a certain threshold. That threshold for federal estate tax purposes is $12,060,000 in 2022. If you die this year, assets over that amount will be taxed, and the tax rate can be as high as 40%.
· The GST tax is a 40% tax on assets if you “skip” your children and leave assets directly to your grandchildren or in trust for them. The amount of GST allocation that every person has is the same as the estate tax exemption amount, $12,060,000 per person in 2022. This often leads people to think that they are the same tax, when they are actually two separate taxes.
The GST tax is on top of the estate tax. When you die, your estate could be subject to a 40% estate tax (for assets over $12,060,000), and then the assets could be subject to a 40% GST tax if you skip a generation. For that reason, it is an important tax to pay attention to GST.
The GST tax is imposed in three ways:
· Someone leaves money to a “skip” person such as a grandchild either outright or in trust for them.
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· An interest in a trust terminates and there are no more “non-skip” people. For instance, you created a trust for your children and grandchildren and all your children have died, leaving only “skip” people.
· A trust makes a distribution of income and/or principal to a “skip person.”
Be aware that GST does not only apply to monies left to your grandchildren and trusts for them. It also applies to other “skip” people who are more than 37 ½ years younger than the person making the transfer. And it does not only apply to relatives. Someone who is 80 years old and leaves money to her friend’s child who is 30-years-old could trigger a GST tax.
Many people have created dynasty trusts over the last few years and are gifting large amounts of money to them. If you make gifts during your lifetime, you will need to allocate GST to the gifts on a gift tax return. A GST allocation may not affect you or your children, but it will affect future generations. Speak with your advisors about how to best allocate GST as part of your planning.