The goal in Generation-Skipping Transfer (GST) tax planning is to transfer assets, together with future appreciation, to or for the benefit of grandchildren and other “skip persons” without incurring GST tax.
The GST tax is a flat transfer tax equal to the maximum federal estate tax rate at the time of transfer (currently 40% in 2015), imposed in addition to any gift and estate taxes due at the time of a “generation-skipping transfer.” There are three types of generation-skipping transfers: a “direct skip,” a “taxable termination,” and a “taxable distribution.”
A “direct skip” is a transfer, subject to gift or estate tax, to a skip person
A taxable termination occurs on the termination of an interest in property held in trust, unless:
Immediately after the termination a “non-skip person” has an interest in the trust property, or,
At no time after the termination may a distribution be made from the trust to a skip person.
Typically, a taxable termination occurs when, upon a child’s death, the remainder is then held in trust for grandchildren.
A taxable distribution is a distribution from a trust (e.g., of income or principal) to a “skip person,” unless the distribution is a taxable termination or a direct skip.
A skip person is someone who is two or more generations below the transferor’s generation; a trust may also be considered a “skip person” if all of the present interests are held by skip persons.
A non-skip person is any person who is not a skip person. Non-skip persons include the transferor’s spouse, parents, children and their spouses, and nephews and nieces and their spouses.
HOW IT WORKS
The GST tax on a direct skip is tax-exclusive, like the gift tax. The rate of tax is applied only to the value of the transfer. When a direct skip occurs, the transferor (e.g., grandparent) pays the tax with other funds. The payment of the tax is deemed an additional gift to the transferee (e.g., grandchild) and is subject to the gift tax. If the direct skip is under a will or from a trust, the personal representative (executor) or trustee pays the tax out of the transferred property unless the will or trust instrument directs otherwise.
The GST tax on a taxable distribution or taxable termination is tax-inclusive, like the estate tax. The amount of the tax is included in the taxable value of the transfer.
When a taxable distribution occurs, the transferee (e.g., grandchild) pays the tax with the property received from the trust.
When a taxable termination occurs, the trustee pays the tax out of the trust property.
As of 2015, every individual is allowed a $5,430,000 GST Exemption. The GST Exemption allows a grantor to “shield” assets from the GST tax. The amount shielded from the GST tax, and all future appreciation on those assets, will pass free of GST tax. Careful planning is required in order to utilize the GST Exemption.
Certain non-taxable gifts are not subject to the GST tax. Thus, the GST tax does not apply to annual exclusion gifts, or to tuition or medical expenses paid directly to an educational institution or to the medical services provider. If the annual exclusion gift is made in trust, the trust must be for only one transferee (e.g., grandchild) and the trust property must be taxable in the transferor’s estate if he or she dies before the trust terminates.
As stated previously, every individual is allowed a $5,430,000 GST Exemption in 2015. This GST Exemption amount will, for subsequent years, correspond to the Estate Tax Exemption.
Similarly, the GST tax rate will correspond to the highest estate and gift tax rates for subsequent years.
HOW PERSPECTA CAN HELP
We can help you determine how best to utilize your remaining GST Exemption amount to effectively push more of your assets to your heirs. Similarly, we can work to minimize the impact of GST tax on your current assets if your lifetime exemption amount has already been allocated to transfers you have made.
CHOOSING NEW HAMPSHIRE
New Hampshire has the most effective, modern trust laws in the nation. As you contemplate gifts that will provide for multiple generations of your family, you will want to choose a home for your trusts that not only expressly allows your legacy to last in perpetuity, but also provides the flexibility to meet the changing needs of your descendants.
Scott T. Baker, President
Perspecta Trust LLC
One Liberty Lane East
Hampton, NH 03842