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If you”™ve recently become a grandparent, congratulations! You may be thinking about making a gift to the new arrival, but before doing so consider the effects of the generation-skipping transfer (GST) tax on your estate plan.
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The federal GST tax is one of the harshest in the tax code. It”™s a flat tax (currently 45 percent) ”“ in addition to gift or estate taxes ”“ on transfers to a “skip person,” defined as a grandchild (or more remote descendant) or a non-family member more than 37-and-a-half years younger than you. The tax applies to “direct skips” ”“ that is, outright gifts to a grandchild or other skip person ”“ as well as to certain trust distributions.
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The key to avoiding or minimizing GST tax is to carefully allocate your GST tax exemption (currently $2 million). Unfortunately, the rules regarding allocation of the exemption are complex. For example, if you allocate the exemption to certain trusts, it shields the trust assets against GST tax even if they appreciate in value. But that rule doesn”™t apply if you retain certain rights or interests in the trust assets that would cause them to be included in your taxable estate.
Another potential trap involves the automatic allocation rules. These rules are designed to help you avoid unintended tax consequences if you neglect to allocate your GST tax exemption to direct skips as well as to certain GST trusts.
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In most cases, the automatic allocation rules will prevent you from making costly mistakes. But in some cases, they can cause you to waste your exemption by allocating it to trusts that are unlikely to benefit a skip person. To avoid this result, it”™s important to identify trusts that may be considered GST trusts and opt out of the automatic allocation rules if appropriate.
When planning for your own estate, consult your adviser to effectively implement these and any other estate planning strategies.
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David R. Selznick is an attorney and certified public accountant in Armonk, N.Y. Reach him at David@dselznick.com.
