Planning Briefs

Can You Skip Over The Special Tax For Generation-Skipping?

Published Monday, August 3, 2015 at: 7:00 AM EDT

You may already know about the potential tax consequences of transferring part of your estate to your children, either through a gift while you're alive or a provision in your will. But there's also a special rule for gifts that skip a generation—for instance, if you give cash or property to your grandchildren. That can trigger a special "generation-skipping transfer" (GST) tax. The GST tax is subject to the same tax rates that apply to other gifts.

The GST tax was designed to ensure that the wealthiest families wouldn't sidestep estate and gift taxes by moving assets to someone two or more generations younger. It applies to most direct transfers and to certain indirect transfers, such as those made to a trust that designates your grandchildren or great-grandchildren as beneficiaries.

This tax has been around since 1987. But many people don't know it exists until they find out they must pay it. In most cases, however, a generous GST exemption can help you avoid this tax.

For 2016, the GST exemption is $5.45 million, the same amount that's exempt from estate taxes. As a result, it's often still possible to create a "dynasty trust" spanning multiple generations without any dire tax consequences by using the estate tax and GST tax exemptions. Such a trust may go on indefinitely.

Does this affect your personal situation? More information about the GST tax is available upon request.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).