Under current federal law, you can give away a large portion of your wealth to your grandchildren without incurring the generation-skipping transfer tax, or GST. However, Californians who have large estates and wish to do so should plan now if they haven’t already done so as GST exemptions are set to expire in 2025.
What is the GST?
The GST is imposed when someone avoids paying an estate or a gift transfer tax in giving a portion of their estate to someone who is not their child. Federal law indicates that you must gift your children first. The one firm exception to that rule is if your grandchildren’s parents are deceased as they essentially step into their parents’ place. However, with careful estate and tax planning, you can avoid having to pay the GST.
GST exemptions are currently high
As with most laws involving estates, the amount of GST exemptions has increased steadily since 2010 when it was $5 million. Thanks to the passage of the Tax Cut and Jobs Act in 2018, that amount increased to $11.18 million, meaning most people won’t be subject to the tax under current terms. Anything gifted over that amount is subject to a 40% tax. Married couples can double that amount when gifting to their grandchildren. You should note that you need to stay within the $15,000 annual IRC exemption when gifting.
Why you should plan now
Unless Congress changes the law, the GST exemption is set to expire at the end of 2025. Therefore, anyone contemplating estate and generation-skipping transfer tax planning should begin the process immediately if they plan on gifting to grandchildren to help with college costs or other expenses.
Everyone’s tax situation is different. High-net-worth individuals who wish to skip a generation when planning how to distribute wealth after their passing should consult an experienced estate attorney.