Generation-Skipping Trust—GST Definition

What is a Generation Skip Trust (GST)?

A Generation Skip Trust (GST) is a type of legally binding trust agreement in which the contributor assets are passed on to the settlor’s grandchildren, thus “skipping” the next generation, the settlor’s children. By transmitting the settlor’s children, the assets avoid the property taxes— taxes on an individual’s estate upon death — which would apply if the children inherited it directly.

Generation-skip trusts are effective wealth preservation tools for people with significant assets and savings.

Key points to remember

  • A generation-skipping trust (GST) is a legally binding agreement in which assets pass to the settlor’s grandchildren – or anyone at least 37½ years younger – bypassing the next generation of children. of the constituent.
  • By skipping the possibility of receiving the assets, the settlor’s children avoid inheritance tax that would otherwise be due.
  • Skip-generation trusts are taxable if the amount transferred exceeds a certain annually-adjusted threshold ($11.7 million in 2021).

Understanding a Generation Skip Trust (GST)

Because a generational leap trust effectively transfers the assets of the settlor’s estate to the grandchildren, the donorThe children of never acquire ownership of the property. This is what allows the settlor to avoid the inheritance tax that would apply if the assets came into the possession of the next generation first.

Although grandchildren are the most common beneficiaries, the beneficiary of a generation-skipping transfer does not have to be a family member. The beneficiary can be any person at least 37½ years younger than the settlor and not a spouse or ex-spouse.

Generation-skipping trusts can still provide some financial benefits to the next generation, as the settlor can give children access to any income generated by the assets of the trust while leaving the assets themselves in trust for the little ones. -children.

Taxation of the Generation Skip Transfer Trust (GST)

Due to the viability of the generation-skip trust as a loophole to avoid federal estate taxes, changes have been made to the tax code in 1986 which created a tax on transfers by generation jump. Generational transfer tax rates have risen and fallen over the years, with a recent high of 55% in 2001 and a low of 0% in 2010, due to an exemption granted by the Generation Transfer Act 2010. tax relief.

Intended to ensure that people transferring modest sums of wealth to younger generations do not have to bear the weight of the tax burden, these exemptions were guaranteed by the United States Taxpayer Relief Act of 2012. This legislation established a permanent $5 million tax exemption on generation-skip transfers, which meant that federal tax on a generation-skip wealth transfer would only apply if the amount exceeded $5 million. dollars.

However, the GSTT really applies to the very wealthy because the amount transferred is astronomical. Most people will never encounter GSTT due to the high threshold: the tax only applies when the amount transferred exceeds $11.4 million per individual (for 2019), and in 2021 it is $11.7 millions of dollars.

$11.7 million

The amount of tax exemption for generation jump for 2021. 

Increase in the tax exemption for skip-generation trusts

Even with the generation-skipping transfer tax installment, GST still serves as a tool to high net worth individuals to transfer wealth at a lower tax rate. And they became even sharper tools on December 22, 2017, when President Donald Trump signed the Tax Cuts and Jobs Actwhich doubled the tax exemption for generation skipping.

Effective January 1, 2018, the Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption to $11.2 million for singles and $22.4 million for married couples , but only from 2018 to 2025. The level of exemption is indexed to inflation. The maximum tax rate of 40% remains in place.

This law expires on January 1, 2026, pushing the exemptions back to their pre-law amounts unless Congress extends them.

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