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Understanding if a generation-skipping transfer is right for you

On Behalf of | Apr 12, 2021 | Estate Planning, Trusts |

Connecticut residents who have a significant amount of wealth in the form of assets and savings have many options when it comes to estate planning. Trusts are one of the most common entities that are set up to pass along wealth to future generations. One specific type of trust that can help to avoid estate taxes is a generation-skipping trust or GST.

What is a generation-skipping trust?

A generation-skipping trust is a type of legally binding trust that specific assets are passed down to a grantor’s grandchildren. Traditionally, grantors will pass down their assets to their children. However, when they do this, their children end up paying estate taxes. By skipping a generation and transferring the assets to their grandchildren, estate taxes won’t apply. This type of trust is ideal for those with a large amount of wealth that want to preserve it.

Grantees don’t always have to be grandchildren

When you’re using these tax reduction strategies, you don’t have to reserve them just for your grandchildren. Rather, as a grantor, you may pick any beneficiary that is at least 37 1/2 years younger than you, which you would like to receive the assets. A notable exception to this is the grantor may not name a former spouse or a current spouse as a beneficiary.

Generation-skipping transfer tax

While using a GST can help your beneficiaries to avoid large estate taxes, the federal government did implement a transfer tax in 1986 to help avoid this federal estate tax loophole. This transfer tax only applies to transfers of more than $5,000,000. The transfer rate has been very variable over the years, running from a low of 0% to a high of 55%.

If you have a lot of wealth that you want to pass on to your future generations without having to burden them with large tax bills, a GST is a great option. For most people, their beneficiaries can escape transfer taxes altogether because the transfers typically below the threshold. It’s always advisable that you speak with an attorney to determine whether or not a GST is the right option for you.