Submitted by: Peggy R. Hoyt, J.D., M.B.A., The Law Offices of Hoyt & Bryan, LLC, Family Wealth & Legacy Counsellors, One Senior Place Resident Business

Generation Skipping Transfer (GST) tax. Ever heard of it? If you haven’t, you need to know about it. It is often an overlooked estate planning issue that is a very expensive tax equal to the highest federal estate tax rate at the time, currently at 47%. And it is an additional tax to the federal estate tax!

In the past, generation skipping trusts were common, especially among the wealthy. The grandfather would set up a trust that distributed only income (no principal) to his children. The trust principal would be distributed later to his grandchildren and future generations. This allowed the trust assets to grow tax-free and appreciate in value and avoided the heavy taxation that would have occurred if each generation had been taxed on the full inheritance. But then, the one uncle we all have in common decided he wanted his share of taxes, just as if each generation had received its inheritance and paid taxes on it. So, if you leave substantial assets to your grandchildren and future generations – bypassing your children’s generation – these assets may be subject to the generation skipping transfer tax. (This tax also applies if you leave assets to a non-relative who is more than 37 1/2 years younger than you.)

For example, $10 million of a $15 million estate was left directly to the grandchildren in 2005 with no estate planning, $4.7 million (47% of $10 million) would be paid in estate taxes. Another $2,491,000 (47% of the remaining $5.3 million) would be paid in GST taxes. The grandchildren would only receive $2,809,000–a little more than one-fourth of their $10 million inheritance. The good news is that most people won’t be affected by the GST tax–because everyone has an exemption from this tax. In 2005, the GST tax exemption is $1,500,000 which means that in 2005 you and your spouse together can leave up to $3,000,000 to your grandchildren and future generations without having to pay the generation skipping transfer tax.

As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the GST tax is scheduled for repeal in 2010, but reapplies in its entirety as of 2011. Just like the federal estate tax exemption, you have to plan ahead so you don’t waste one of these GST tax exemptions. One way is by establishing a generation-skipping trust during the grantor’s lifetime in which all, or part, of the GST tax exemption will be allocated to the trust on the grantor’s gift tax return. Or it can be established upon the grantor’s death in which the executor or personal representative of the estate would allocate the exemption on the decedent’s estate tax return.

Whether you establish a generation-skipping trust during your lifetime or at death, assets will also be subject to gift or estate taxes. Therefore, the tax consequences of when the trust is established must be compared. With proper planning, substantially more than the amount of the GST tax exemption might ultimately pass to future skip generations free from the GST tax transfer.

THE LAW OFFICES OF HOYT & BRYAN, LLC
FAMILY WEALTH & LEGACY COUNSELLORS
MARGARET “PEGGY” R. HOYT, J.D., M.B.A. †*
RANDY C. BRYAN, J.D.† ‡
SARAH S. AUMILLER, J.D.
†BOARD CERTIFIED IN WILLS, TRUSTS & ESTATES
‡BOARD CERTIFIED IN ELDER LAW
*CERTIFIED LEGACY ADVISOR™

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