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What Is Generation Skipping Transfer Tax

Being a grandparent isn’t just about excessive Christmas presents, family photos, and paying a grandchild $20 to mow a 10 square-foot lawn. Unfortunately, although not commonly known and even less commonly understood, the generation-skipping transfer tax can be an expensive barrier when trying to pass assets to grandchildren and should be heeded appropriately.

What Is Generation Skipping Transfer Tax

Better known as GSTT, the generation-skipping transfer tax imposes significant added taxation on inherited assets that have skipped one or more generations or, more precisely, to anyone more than 37.5 years younger than the transferor. In essence, the GSTT was established to prevent assets from being distributed throughout multiple generations of a family without being appropriately taxed.

For instance, if a grandparent bequeaths money directly to a grandchild rather than a child, estate taxes are essentially missed for an entire generation. In other words, rather than estate taxes being paid as money is transferred from grandparent to child and then again from child to grandchild, GSTT makes up for the loss and imposes an additional tax when attempting to skip a generation. Like it or not, GSTT can pose significant financial liability if not properly prepared for.

Proper Planning Is Key

As foreboding as the GSTT might sound, grandparents should be happy to learn they are not completely helpless to this significant additional tax, and have been givensignificantly more breathing room thanks to recent tax reform. Just as there is an estate tax exemption that allows for a certain amount of assets to be transferred free of estate taxes, a GSTT exemption also exists.

Likewise, gifts that fall under the annual gifting allowance are not subject to GSTT. Therefore, whether it’s for college tuition, a new car, or just a bit of spending money, grandparents have the ability to transfer assets directly to grandchildren without taxation as long as such transfers fall within certain parameters.

Ultimately, GSTT is yet another wrinkle that only further complicates the already intricate and vast estate planning considerations one must navigate to establish an effective and efficient estate plan. Seeking the guidance of an estate planning attorney is always in one’s best interest if there are even the smallest amounts of confusion and apprehension over GSTT or any wealth transfer issues.

This content is designed to provide general information on the subjects covered. It is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.

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Gary Marriage Jr. is the founder and CEO of Nature Coast Financial Advisors, which educates retirees on how to protect their assets, increase their income and reduce their taxes. Marriage is a national speaker, delivering solutions for pre-retirees, business owners and seniors on the areas affecting their retirement and estates. He is an approved member of the National Ethics Bureau, and has been featured in “America’s Top Hometown Financial Advisors 2011” and was selected to contribute to a book with Steve Forbes titled “Successonomics”

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