Generation Skipping Trust

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A generation skipping trust is an irrevocable trust to which the generation skipping transfer tax (GSTT) may apply. These taxes are rarely paid, because In 2022 husband and wife can set up a generation skipping trust for up to $24,120,000, i.e., $12,060,000 x 2, without incurring the GSTT. These extraordinary large exemption amounts may be drastically reduced when the law sunsets in 2025.

The planning technique simply requires the testator to transfer his or her children’s inheritance in trust for their lifetime rather than giving it to them outright. On the children’s death, the trust terminates and is distributed to the grandchildren. Because the children do not own the trust property, none of the trust assets are included in the children’s estate on their own death. The children could receive the income and, if needed, the principal from the trust throughout their lifetime.

The GSST has an interesting legislative history: Congress was concerned that wealthy families had their estate planners create a life estate in their assets for their children, followed by a life estate in the assets for their grandchildren, followed by a life estate in the assets for their great-grandchildren and so forth. These plans effectively moved incredible amounts of wealth from generation to generation avoiding estate tax indefinitely because life estates are not subject to the federal estate tax. The initial GSTT that Congress created, however, was so widely criticized that the Tax Reform Act of 1986 retroactively repealed the 1976 version and implemented the current version (source: Journal of Accountancy).

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