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What is GSTT? Your Grandkids Could Get Taxed

One of the most complicated tax concepts in estate planning is the generation-skipping transfer tax.

For many Manhattanites, your estate might be in the millions so it makes sense to sit up and pay attention to GSTT when planning your estate.

Without planning, your grandkids could be taxed on the wealth that reaches them through your will or your trust. So if you have a considerable amount of wealth to hand down, you want to plan carefully.

Let's try to make this concept a little easier by putting it in question form.

Why did the government come up with GSTT?

  • The government was worried that wealthy families were creating estate plans that gave their kids lifetime use of the assets and then sent down the lifetime use to the grandkids (and so on). These life estates were not subject to estate tax so now, we had all of this wealth moving down the chain and escaping estate tax.

What is GSTT? The so-called GSTT is a tax that applies when property moves:

  • From a grandparent's generation to the grandkids' generation.
  • To an unrelated person and the recipient is 37 1/2 years younger than the donor.

When does GSTT apply?

  • When the transfer to one of the donees mentioned above avoids gift tax or estate tax.

What can you do in your estate plan to minimize GSTT?

  • You can create a Generation Skipping Transfer Trust or a dynasty trust. A dynasty trust will allow the property to be passed through the generations without being hit by GSTT at each generation.

Note that these trusts won't shield the donor from paying any tax on the transfer. They'll just protect the recipient from paying tax.

The Generation-Skipping Transfer Tax is one of the most complicated tax concepts in estate planning. If you feel that you might need to plan around it, you need to speak with a sophisticated estate planner to discuss your options.

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