When estate planning, smart and strategic decision-making will help to ensure that your wealth is preserved and passed on to your loved ones efficiently. One often-overlooked aspect of estate planning is the Generation-Skipping Transfer Tax (GSTT)—a federal tax that can significantly affect the transfer of assets across multiple generations.
At Monk Law Firm PLLC, our experienced attorneys have been helping Carolinans make the estate planning the process straight-forward, personalized, and as stress-free as possible. See below for our thoughts on understanding the generation-skipping transfer tax and how it can be used to craft a well-structured estate plan.
What Is the Generation-Skipping Transfer Tax?
The Generation-Skipping Transfer Tax (GSTT) is a federal tax that is imposed when people transfer wealth that skips a generation. What does that mean? It’s designed to prevent people from bypassing their children to give assets directly to their grandchildren or other younger beneficiaries, allowing them to avoid estate taxes at the skipped generation.
The GSTT applies to:
- Direct transfers to grandchildren or great-grandchildren
- Gifts made to non-family members more than 37.5 years younger than the donor
- Certain trust distributions benefiting “skip persons” (e.g., grandchildren or unrelated persons more than 37.5 years younger)
How the GSTT Works
The GSTT is separate from estate and gift taxes, though it often applies in conjunction with them. Key aspects include:
- Flat Tax Rate: The GSTT is assessed at a flat rate, which is currently 40%—the same as the highest federal estate tax rate.
- Exemption Amount: Each individual has a lifetime GSTT exemption, which is $13.61 million per person in 2024. Married couples can combine their exemptions to shield $27.22 million from the GSTT.
- Applicable to Trusts: Trusts that distribute assets to skip persons can trigger the GSTT, requiring careful trust planning.
Strategies to Minimize the GSTT
Proper estate planning can help mitigate or eliminate GSTT liability. Here are several strategies to consider:
1. Use the GSTT Exemption Wisely
Leveraging the GSTT exemption strategically allows you to transfer significant wealth to future generations tax-free. Consider making lifetime gifts or funding irrevocable trusts to maximize this benefit.
2. Establish a Dynasty Trust
A dynasty trust is a long-term trust designed to hold assets for multiple generations without incurring additional estate or GST taxes. This can be an excellent tool for preserving wealth.
3. Annual Exclusion Gifts
Utilizing the annual gift tax exclusion (currently $18,000 per recipient in 2024) allows you to transfer assets gradually without using your lifetime exemption.
4. Qualified Transfers for Education and Medical Expenses
Payments made directly to educational institutions or medical providers on behalf of grandchildren or other beneficiaries are not subject to GSTT, making this an effective tax-free wealth transfer method.
Call a Fort Mill & Charlotte Estate Planning & Business Law Attorney
Both North Carolina and South Carolina do not impose a state estate tax, which makes federal estate planning considerations like the GSTT even more important. At Monk Law Firm PLLC, we specialize in helping Carolinian families create tailored estate plans that minimize tax exposure and protect generational wealth. Contact us today to discuss how we can help you plan effectively for your family’s future.