Posted by The TaxAdvocate Group, LLC

An Insight into Gift, Federal Estate, and Generation-Skipping Transfer (GST) Taxes

An Insight into Gift, Federal Estate, and Generation-Skipping Transfer (GST) Taxes

In making some taxable gifts above a certain threshold, one will be subjected to a federal gift and estate tax. For the 2020 tax year, an individual can give away $11.59 million during their death or lifetime before incurring a federal estate tax.

This is the individual’s federal exemption from gift and estate taxes, which increases every year to account for inflation. Any taxable gift you get above this value will give rise to a 40% tax. Also, gifts to grandkids will experience a unique "generation-skipping transfer" provided they are above the tax exemption amount for GST taxes - $11.58 million per individual in 2020. 

The federal gift and estate taxes are unified, meaning that gifts subject to the exemption in life will reduce death's exemption value. 

Tax-free Gifts 

Alongside these lifetime exemptions, there are some gifts one can make, which will not be held against the lifetime exemption you have. Also, it will not incur gift, estate, or GST tax. 

  1. “Med/Ed” GiftsGifts meant for educational or medical purposes have no limits in amounts but have limitations in pursuit. The payment should be directly made to the medical provider or educational institution to qualify even though it comes with no minimum quantity. 

  2. Annual Exclusion Gifts: Gifts that merit yearly exclusion from the tax gift have a limit on the amount, even though no limit in purpose. One can give $15,000 every year to anyone for whatever reason. The gifts can go to a qualifying trust or a 519 College Savings Plan. 

 What is Generation-Skipping Transfer Tax?

This is a federal tax that arises in the transfer of property by inheritance or gift to the recipient (beneficiary), who must be 37.5 years younger than the donor. GST tax aims to help ensure that you pay taxes when you have assets in the trust, and the recipient gets the amount above the GST credit. 

Before the introduction of the GST, rich people could transfer gift money legally to their grandkids without the payment of federal taxes (estate). This legislation canceled the loophole in which inheritance could go above one generation to dodge double estate taxation.

The idea behind Generation-Skipping Transfer Tax

This is an extra tax applied to property transfer, which skips one generation. It is shortened as GST (generation-skipping transfer) and was implemented to stop families from dodging the estate tax for a generation or more by making bequests or gifts directly to the grandkids or great-grandkids. 

This gift skips the generation of the parent to prevent the inheritance from double estate taxation. With GST, the grandkids will have the same asset value they would generally have should the inheritance be transferred to them straight from their parents and not the grandparents. 

The transferor is the person giving the gift, while the recipient is called the skip person. A lot of people prefer using the grandkid as the skip person even though a skip person cannot be a family member. Anyone can qualify to get a generation-skipping transfer provided that they are 37.5 years younger than the transferor. 

The imposition of a generation-skipping transfer only happens if the transfer dodges incurring a real estate or gift tax at every generation level. Uncle Sam puts forward an extra tax layer on bequests and gifts above the lifetime and gift exclusion to account for the taxes that will be avoided by skipping a generation. The implication of this is that GST is due only when the beneficiary gets paid above the GST estate credit.



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