Your current financial plan may include wealth transfers to grandchildren, great-grandchildren or other descendants, and these gifts may be subject to a generation-skipping tax (GST).
Q: Why was the GST created?
A: The GST was created to prevent families from essentially *skipping* a generation*s worth of estate taxes as wealth is passed down.
Q: What changes were made to the GST recently?
A: In 2017, the GST exemption (the amount that can be transferred to grandchildren without incurring a federal GST tax) was $5.45 million adjusted for inflation. Now, under the new tax reform law, the GST exemption is doubled to roughly $11.2 million. In 2026, however, the exemptions revert back to pre-2018 levels.
Q: What opportunities does the new GST exemption present?
A: Doubling the exemption presents an opportunity for families to increase wealth transfer plans without incurring taxes. Individuals may want to take advantage of the increased GST exemption to create GST-exempt trusts. Meanwhile, those with existing trusts subject to the GST tax may want to consider early distributions to take advantage of the higher exemption.
Q: What are some unintended consequences that come with these new GST exemptions?
A: The higher exemption may create complications for individuals with plans funded according to the exemption limits effective on the date of their death. Those plans should be reviewed quickly, as the changes could have a significant, and unintended, impact. Assume, for example, your plan is written to max out your GST exemption. Under the old law, your grandchildren would have gotten about $5.6 million. Under the new law, they*d get roughly $11.2 million * possibly leaving your surviving spouse without sufficient resources.
Q: What are some other considerations to take into account?:
A: If your children have a sizable estate, it might make sense to put some, or all of your estate, into a GST trust to be given to the grandchildren. That avoids increasing your children*s taxable estate.
Q: What would make me reevaluate my plan?
A: Some wills and trusts contain a clause that states that amounts exceeding the available GST exemptions are to be allocated to charity. Given the changes in the law, you may need to reevaluate your giving plans accordingly.
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