Monday, December 7, 2015

Minimize Generation-Skipping Transfer Tax Exposure

By Tara Halbert

The Generation-Skipping Transfer (“GST”) Tax applies when a person makes a gift during life or bequeaths property at death to a “skip person”. A skip person is generally a person two or more generations below the donee/decedent (i.e., a grandparent to a grandchild), or in the case of unrelated parties, a person 37.5 years younger than the donee/decedent. Any person may make a lifetime gift to any skip person of $14,000 per donee per year with no GST tax consequences. Each person also has a lifetime GST exemption amount of $5,430,000 in 2015, exclusive of any annual exclusion gifts. Any gifts or bequests in excess of the lifetime exemption amount is subject to GST tax rate at a rate of 40%, after the payment of any gift or estate tax owed at a rate of 40%.

  1. Avoiding Generation Skipping Transfer Tax on Lifetime Gifts. What if a grandparent wants to gift property in excess of $14,000 to a grandchild each year without using any lifetime GST tax exemption? There are several “freebies” with the GST tax (and gift tax) that provide an excellent way to transfer property among generations with no adverse tax consequences. A grandparent may make unlimited gifts to a grandchild each year for the grandchild’s health or education. Educational gifts must be paid directly to the institution. Gifts to a grandchild to be used for educational expenses do not qualify. “Education” includes elementary school through graduate school. Another “freebie” is gifts for the benefit of a grandchild for “health” expenses, defined broadly to include medical bills and health insurance premiums. Again, these payments by a grandparent must be made directly to the health care provider or insurance company, but may be for any amount of medical expenses or insurance premiums incurred. For wealthy families, having a grandparent pay for educational and health expenses for children and grandchildren is a very efficient way to transfer wealth with no tax consequences.

  1. Avoiding Generation-Skipping Transfer Tax on transfers from a GST Non-Exempt Trust. In large estates, a trustee of a trust for the benefit of a grandchild may find themselves with a trust that is only partially exempt from GST tax because the decedent’s estate was too large to fully exempt all assets. This means that any distribution to a grandchild from the non-exempt portion of a trust will be subject to GST tax at a rate of 40% when the distribution is made. The trustee of a partially exempt GST trust should exhaust the non-exempt portion, to the extent possible, on educational and health expenses as described above. The same rules apply to distributions from a GST non-exempt trust as to gifts from a grandparent to grandchildren – the trust may make payments on behalf of the grandchild for health and education, as long as such payments are made directly to the educational institution, health care provider or insurance company. No GST tax will be owed on these payments. This is a great way to exhaust a non-exempt GST trust for a grandchild without paying any tax while making distributions for the grandchild’s other needs from the portion of the GST trust that is exempt.

These are just a few of the ways to minimize GST tax exposure on transfers from grandparents to grandchildren. Please contact Tara Halbert in our Lexington, Ky. office at 859-899-8711 with any questions you may have.