By: Barry E. Haimo, Esq.
September 5, 2019
What Is a GST Trust?
When assets over a certain value are passed from one generation to the next, an estate tax is placed upon those assets.
For example, if Parent A leaves an inheritance to their child B above the estate tax exemption amount (currently $11.4 million), a federal estate tax of 40% will be levied on those inherited assets. If, many years later, Child B then leaves those same assets to their child (Parent A’s grandchild), they will again be subject to a similar estate tax.
This is where GST trusts come in. A generation-skipping trust (GST) – also known as a Dynasty trust – is an estate planning tool that you can use to transfer assets with considerable tax savings by skipping a generation.
What does that mean?
How GST Trusts Work
Through a generation-skipping trust, assets are transferred directly from a grandparent to grandchildren. This means that one taxation step is taken out of the estate tax equation (i.e. no tax is paid for assets being transferred from parent A to child B because they’re going directly to grandchild A).
It’s important to note that the beneficiary doesn’t always have to be the grantor’s grandchild. Other beneficiaries, collectively referred to as “skip persons,” may benefit from a GST as well. Skip persons may include great-grandchildren, younger descendants, or other unrelated individuals as long as they are at least 37.5 years younger than their grantor.
How Does the Generation In-Between Benefit from a GST?
GST rules require that the grantor leaves his or her assets to their grandchildren rather than their children. This benefits the grantor’s children in several ways.
First, the grantor’s children don’t have to pay estate taxes that would be levied if the assets were transferred to them.
Secondly, the distributions in a GST do not disinherit the grantor’s children unless this is the grantor’s wish. Because of this, the grantor’s children can still enjoy financial benefits if the grantor gives them access to income generated by the trust’s assets.
How does this work?
During their lifetime, the grantor’s children may, for example, use the trust’s assets for their education, health, support, maintenance, and so on. They may even have the power to decide how those assets will be split among the grantor’s grandchildren.
All this without having to pay for a generation’s worth of taxes on the estate.
Is a GST Trust For You?
Generation-skipping trusts are best set up for large estates where the grantor’s children already have enough assets to adequately meet all of their anticipated financial needs.
These are situations where the grantor feels that if they passed their assets to their children, the children would neither need nor use them in their lifetime, and the assets would ultimately be passed on to the grandchildren anyway.
Be absolutely sure, though. Generation-skipping trusts are irrevocable – they can be neither changed nor canceled once initiated. That being said, the terms of the trust can be written to provide some level of flexibility within the confines of the GST.
Given the irrevocability and complexity of GST planning, it’s advisable to consult an experienced estate planning attorney before creating one. In addition to helping you set up the trust, a professional can offer guidelines on how to create trust terms with a keen eye on the future, and help you take into account all possible situations that may arise.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
YOU ARE NOT OUR CLIENT UNLESS WE EXECUTE A WRITTEN AGREEMENT TO THAT EFFECT. MOREOVER, THE INFORMATION CONTAINED HEREIN IS INTENDED FOR INFORMATIONAL PURPOSES ONLY. EACH SITUATION IS HIGHLY FACT SPECIFIC AND EXCEPTIONS OFTEN EXIST TO GENERAL RULES. DO NOT RELY ON THIS INFORMATION, AS A CONSULTATION TO UNDERSTAND THE FACTS AND THE CLIENT’S NEEDS AND GOALS IS NECESSARY. ULTIMATELY WE MUST BE RETAINED TO PROVIDE LEGAL ADVICE AND REPRESENTATION. THIS INFORMATION IS PROVIDED AS A COURTESY AND, ACCORDINGLY, DOES NOT CONSTITUTE LEGAL ADVICE.