As you develop your estate plan, you’ve decided to leave some property or other assets directly to your grandchildren. Perhaps you have a vacation home that your adult grandson particularly loves and takes his own family to regularly. Maybe you have an art collection that your granddaughter has expressed interest in and would appreciate more than anyone else in the family.
Before you leave assets to your grandchildren or anyone significantly younger than you, it’s important to know about the generation-skipping tax (GST) or generation-skipping transfer tax. This is a tax that people may incur if they inherit or are otherwise given property directly from their grandparents without it first going to their parents. It should be noted that if the grandchildren’s parents are already deceased, they’d be exempt from the GST.
The GST doesn’t only apply to gifts and inheritances by grandparents to grandchildren. Anyone who receives property from someone who is a minimum of 37.5 years older than they are may have to pay the GST.
Leaving these assets to a grandchild or other younger person via a trust may not help avoid a GST. Trusts can also be considered “skip persons.”
The GST was implemented in 1976 by the Internal Revenue Service (IRS) so that families couldn’t choose this option to avoid being assessed estate taxes twice — when property is left to a person’s adult child and then when that person leaves it to one of their children.
Not all inheritances are subject to the GST and other estate taxes. This year, anything up to $11.18 million is exempt from these taxes. Further, there’s an annual exemption of $15,000 per recipient.
There are other exemptions and ways to leave assets to grandchildren, other younger family members and loved ones without worrying that they’ll face this hefty tax (which is currently at 40 percent). Your Arizona estate planning attorney can provide the necessary guidance and information on how you can help your heirs and beneficiaries avoid the GST as well as other estate taxes and fees.