Estate and Death Taxes: What is the Generation Skipping Transfer Tax?

Many aspects of estate planning focus on reducing death taxes. One such tax is known as the generation skipping transfer (GST) tax. While many are familiar with the standard Federal estate taxes, the GST is an additional tax that is imposed on property left or gifted from a grandparent to a grandchild whether it is transferred as a gift, by will or by creating a Trust. The GST tax is also relevant if property is passed or gifted to any individual that is more than 37.5 years younger than the individual.

Like the estate tax, in 2010, this tax was technically repealed, meaning there were no generation skipping transfer taxes for this year, but in 2011 they will return with a vengeance, with only a $1,000,000 exemption beginning January 1, 2011. The tax rate is to be set at a hefty 55% for property exceeding the exemption amount.

The GST tax was originally approved to close an estate tax loophole. Normally, grandparents would bequeath their estates to their children, and incur estate taxes. Then the children would pass on the estates to their children, the grandchildren, incurring another set of estate taxes.

Then people realized they could skip a generation and leave their estates directly to their grandchildren and avoid one set of these estate taxes. Specifically, wealthier families were leaving property in trust funds for their grandchildren, and avoiding plenty of taxes while doing so. The GST tax was imposed to prevent this by taxing transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger.

With the changes in estate taxes and generation skipping transfer taxes that went into effect on January 1, 2011, now is the time for estate planning that can reduce estate taxes while meeting the goals of your family.