Question 1: what is the GST?
GST stands for “generation-skipping tax,” sometimes known as the generation-skipping transfer tax. This is a federally imposed tax that can apply either to gifts you give during your lifetime or to wealth transfers you make through your estate. However, it only applies when you transfer property to a family member who is more than one generation distant from you. For example, this tax can apply if you transfer property from yourself to your grandchild.
Question 2: Why does the tax exist?
When you transfer property to your relatives after you die, you may incur an estate tax if you pass on a lot of property. However, some people found that they could get around some estate taxes by transferring property to their grandchildren. Let’s say, for example, that you have a large estate. You decide to transfer your estate entirely to your children. When you do this, your estate will have to pay estate taxes. Also, when your children decide to leave the inheritance you left them to their own children, that transfer will also be subject to an estate tax if it is large enough. Some people tried to avoid this double estate tax by transferring the inheritance directly to the grandchildren, and the generation skipping transfer tax was designed to close that loophole.
Question 3: Should I worry about the GST?
Maybe. There is a federal GST exemption limit that means the law will not apply to you unless you make multi-million dollar transfers to your grandchildren. However, this limit could change, so even smaller estates might have to plan for it.