In addition to estate and gift taxes, a third tax applies to assets you transfer to someone two or more generations below you, such as your grandchildren. This “generation-skipping transfer (GST) tax” applies to trusts and individuals, and has features similar to the estate tax rules — and some important differences.
For example, under both sets of rules you can make lifetime and testamentary tax-free transfers up to a specified “exemption.” While the amount is the same for both taxes ($5,340,000 for 2014), the exemptions are unrelated.
Another similarity: You and your spouse can each claim a GST exemption. That means with planning you can make gifts to your grandchildren or other “skip” beneficiaries of up to $10,680,000.
However, the estate tax rule of sharing unused exemptions between spouses (known as portability) does not apply to the GST exemption.
If you make generation-skipping transfers for which regular gift tax is not due — such as gifts with a total combined value of less than $14,000 during a year — you won’t pay GST tax either. That’s also true for tuition sent directly to a qualified school and medical expenses paid to healthcare providers.
Finally, while the federal estate tax rate varies depending on the amount of your taxable assets, generation-skipping transfers are taxed at a flat 40%.
Please contact us if your estate plan includes bequests and gifts to your grandchildren. We can make sure you’re not surprised by an unexpected tax burden.