If your adult children face the prospect of high taxes on their estates, consider skipping a generation with some of your bequests and gifts. But beware of the generation-skipping transfer (GST) tax, which applies to transfers to a “skip person” — generally anyone more than one generation below you, such as a grandchild or an unrelated person more than 37½ years younger than you.
The GST tax rate is the same as the top estate tax rate. Fortunately, there’s a GST tax exemption. As with the gift and estate tax exemptions, the GST tax exemption is $5.43 million for 2015 ($5.45 million for 2016). Each spouse has this exemption, so a married couple can use double the exemption. Once you’ve used up your exemption, additional GSTs that aren’t otherwise exempt will be subject to the GST tax.
Gifts that qualify for the $14,000 per year per recipient annual gift tax exclusion generally are exempt from the GST tax. As the end of the year nears, consider making annual exclusion gifts before December 31, since unused exclusion amounts don’t carry forward from year to year.
A solid gifting strategy can benefit your loved ones and reduce your taxable estate. However, you need to be aware of potential GST tax liability. Please call us with questions regarding the GST tax or your gifting strategy in general.