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Planning for the generation-skipping transfer tax

On Behalf of | Aug 23, 2021 | Trusts |

High-net-worth Connecticut families might have to engage in tax-reduction strategies to avoid estate taxes, gift taxes, and the generation-skipping tax. While the current federal exemption amount is high, it might revert back to a lower amount in 2025 if Congress does not extend the provisions under the Tax Cuts and Jobs Act. It is important for people to understand the generation-skipping tax and to take steps to avoid it through careful tax and estate planning.

What is the generation-skipping tax?

In the past, people with very large estates that would be subject to the federal estate tax would skip a generation to prevent the IRS from assessing the estate tax twice. For example, grandparents would leave their assets to their grandchildren instead of their children to avoid their estates being subject to the estate tax when passed to each successive generation. To prevent this, the generation-skipping tax was enacted. This tax applies to assets passed to grandchildren and to anyone else who is 37 1/2 or more years younger than the donor. In addition to grandchildren and other young people, trusts can also be treated as skips as well.

Tax-reduction strategies

There are several tax-reduction strategies that can be employed to reduce the taxes that an estate might be forced to pay. People can take advantage of the $15,000 per year gift tax exclusion and give away up to $15,000 per year per recipient to reduce the total size of their estates. There are also lifetime exemptions to the generation-skipping tax that people can claim when they want to transfer funds to grandchildren or others and skip a generation. Finally, people might establish a dynasty trust to preserve wealth for generations.

Employing tax-reduction strategies might help people with sizeable estates preserve family wealth to benefit future generations. In addition to the federal estate, gift, and generation-skipping taxes, people also need to be aware of the Connecticut estate tax, which has a somewhat lower exemption amount than the federal estate tax exclusion.