Being a grandparent isn’t just about excessive Christmas presents, family photos, and paying a grandchild $20 to mow a 10 square-foot lawn. Unfortunately, although not commonly known and even less widely understood, the generation-skipping transfer tax can be an expensive barrier when passing assets to grandchildren and should be heeded appropriately.

What Is Generation-Skipping Transfer Tax

Better known as GSTT, the generation-skipping transfer tax imposes significant added taxation on inherited assets that have skipped one or more generations or, more precisely, to anyone more than 37.5 years younger than the transferor. In essence, the GSTT was established to prevent assets from being distributed throughout multiple generations of a family without being sufficiently taxed.

For instance, if a grandparent bequeaths money directly to a grandchild rather than a child, estate taxes are essentially missed for an entire generation. In other words, rather than estate taxes being paid as money is transferred from grandparent to child and then again from child to grandchild, GSTT makes up for the loss and imposes an additional tax when attempting to skip a generation. Like it or not, GSTT can pose significant financial issues if not adequately prepared for it.

Proper Planning Is Key

As foreboding as the GSTT might sound, grandparents should be happy to learn they are not entirely helpless to this significant additional tax given just a bit of preparation. Just as an estate tax exemption allows for a certain amount of assets to be transferred free of estate taxes, a GSTT exemption also exists.

Likewise, gifts that fall under the annual gifting allowance are not subject to GSTT. Therefore, whether it’s for college tuition, a new car, or just a bit of spending money, grandparents can transfer assets directly to grandchildren without taxation as long as such transfers fall within specific parameters.

Ultimately, GSTT is yet another wrinkle that only further complicates the already intricate and vast minefield one must navigate to establish an effective and efficient estate plan. Seeking the guidance of an estate planning professional is always in one’s best interest if there are even the most minuscule amounts of confusion and apprehension over GSTT or any wealth transfer issues.

Have questions about how the GSTT can possibly impact your situation or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!