Generation-Skipping Trust

A generation-skipping trust is commonly abbreviated as GST, and it is precisely what it sounds like. The person who places or funds the trust with their asset is known as the grantor. The grantor establishes a GST with the intention that everything gets passed down while skipping a generation. Think of a grandparent who wishes to give specific assets to their grandchildren. The beneficiaries are not members of the next generation—i.e., the grantor’s children. 

An estate plan is a series of documents that have benefits and drawbacks. Someone would choose to create a GST because of its advantages: the assets may avoid estate tax.

What is a GST?

As the name implies, the grantor’s children will never take ownership of the assets inside of the GST. But failing to look past the name of this trust prevents you from seeing its full potential. The transfer from grandparent to a grandchild is a common reason to create one, but the benefactor chosen to receive the assets in a GST doesn’t have to be your grandchild—or even a member of your family. 

If you wish to create a GST, the benefactor has to be a minimum of 37.5 years younger than you. Furthermore, they cannot be your spouse or former spouse. In other words, if your spouse is 37.5 years younger than you, you can designate them as the beneficiary of GST to avoid estate taxes.

Does a GST Avoid All Taxes?

The federal government created the GST to eliminate tax loopholes. A GST contains some of the intentions of both gift and estate taxes. And it potentially could avoid taxes altogether. Whether yours will be subject to federal taxes depends on the value of the assets. 

The American Taxpayer Relief Act set the exemption level at $5 million. If you are relieved by the amount, you’ll be even happier to know that the amount was increased to $11.7 million per individual in 2021. 

Jayaraman Law 

One of the underlying—and often overlooked—takeaways is how much the exemption threshold has changed. When you look at the history of the estate tax, you will see that in 2018, The Tax Cuts and Jobs Act (TCJA) pushed the estate tax exemption to $22.4 million for a married couple. 

However, that legislation ends on January 1, 2026. At that time, the exemption threshold will return to what it had been before the TCJA. No one knows for sure what will happen, but the right estate planning attorney can prepare you and your estate for a wide range of contingencies. It is about preparing for the future rather than knowing it. 

If you are ready to build an estate plan that will stand against time, contact Jayaraman Law to schedule a free 15-minute consultation.

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