When grandparents give money or property directly to their grandchildren without first leaving it to their offspring, they may be subject to the generation-skipping tax (GST), which is also frequently referred to as the "generation-skipping transfer tax." Not simply because grandkids are subject to the GST. It also covers transfers or gifts given to unrelated third parties or family members who are at least 37 1/2 years the donor's junior. The term "skip individuals" is used to describe all such recipients.
Why not?
To avoid an inheritance being liable to estate taxes twice—once when it passes from the grandparents to their children, and then from those children to their children—the child's generation is skipped. Therefore, since 1976, and only for generation-skipping transfers made on or after that date, the Internal Revenue Code (IRC) has imposed an extra tax on these inheritances. However, this additional tax was removed in 1986. To make up for estate taxes that could have been avoided, older irrevocable trusts are grandfathered and free from the GST.Trusts can also be rogue individuals
Both gifts made to these beneficiaries directly and gifts made to them through trusts are subject to the GST. In some situations, trusts are also regarded as skip persons: the donor is the sole beneficiary of the trust, and no distributions of income or property are permitted to anybody who is not a skip person. These people must have "beneficial interests" in the trust, which means they have a right now and in the near future to the principal of the trust and any interest that is earned.A Special Case for Some Descendants
Grandchildren whose parents have passed away are exempt under IRC Section 2651(e). In some situations, the children effectively take their parents' places in line, ending the GST's application to them. As a result, the gift does not skip a generation.The Exemption from Generation-Skipping Tax
Amounts that are exempt from the federal GST can be given directly to grandkids or placed in a generation-skipping trust for their benefit. As of 2022, the GST and federal estate and gift taxes both have the same lifetime exemption, which is rather important. The federal GST was abolished for the majority of that year in accordance with the requirements of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. But on December 17, 2010, it was reintroduced. 6. At the time, the exemption was worth $5 million. Over that amount, gifts were subject to a tax rate of 35%. In 2012, the federal GST exemption rose to $5.12 million, while the tax rate stayed the same. The American Taxpayer Relief Act followed (ATRA). The GST tax rate was raised to 40% under the rules of ATRA, although the exemption amount was extended to $5.25 million. The exemption has subsequently grown from year to year as a result of how ATRA additionally adjusted it for inflation. As of 2016, the exemption from generation-skipping transfer taxes was set at $5.45 million, up from $5.34 million in 2014. Then it went up to $5.49 million in 2017. The exemption was more than doubled to $11.18 million when the Tax Cuts and Jobs Act (TCJA) took effect in 2018. (The ceiling is raised to $11.7 million for 2021 and $12.06 million for 2022 as a result of inflation.) 9. As a result, grandparents are able to give away a lot of money and assets, but it might not be long-term. If Congress doesn't take action to extend it, the TCJA and the majority of its provisions will expire at the end of 2025. 10. The GST tax rate is still set at 40%. Married couples can transfer a sizable sum of money and property tax-free by multiplying these exemption levels by two Most taxpayers won't ever need to worry about these regulations. In order to set up their estates for optimal protection, those for whom they are a concern should consult with an estate planning attorney.The yearly GST exemption
In the same way that gift taxes are covered by the IRC, so is an annual exclusion. As of 2022, you can donate up to $16,000 per person per year without paying GST. For 2022, this amount rises to $16,000. Married couples may give twice as much because they are each allowed to contribute an amount up to the maximum.Skips "Indirect"
"Direct" skips are gifts given to skip people that are made either directly or indirectly through a trust. The direct skip becomes an "indirect" skip when any GST that becomes due at that time is paid rather than using any portion of the lifetime exemption. Usually, the tax is due the year the gift is made.How to File a GST Gift Report
On IRS Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return, all direct skips in excess of the annual exclusion must be disclosed. They are listed in Schedule A, Part II. They become direct skips and are added up over time to be deducted from the $11.58 million lifetime exemption if you also include them on Schedule C of Form 709. Schedule A's Part III lists indirect skips. Each year you do that, your direct savings are deducted from your lifetime exemption, which ultimately results in less exemption remaining to shield your inheritance from estate taxes when you pass away.GST Taxes in Different Regions
State generation-skipping transfer taxes are frequently collected in states that levy estate taxes. To find out the regulations in your area, speak to your state's tax authorities, your accountant, or your estate planning lawyer.Questions and Answers (FAQs)
Does the beneficiary still owe the generation-skipping tax if they aren't related to the person giving them money?
Yes. The generation-skipping tax will be applied over the exemption amount if someone leaves money or assets to someone who is at least 37 1/2 years younger than them.Can a trust that spans generations be shattered?
A GST cannot be dissolved or broken because it is irrevocable.The generation-skipping tax is paid by whom?
If the funds and assets are held in a direct GST, the person who establishes the trust (for instance, the grandmother) will pay the tax and make the necessary arrangements. If the assets are included in an indirect GST, the skip beneficiary (for instance, a grandchild) will be responsible for paying taxes instead of the immediate beneficiary (for instance, the parent of the skip beneficiary). The inheritance proceeds can be used to cover those taxes.