With the lifetime gift and estate tax exemption at $5.43 million and portable between spouses, many high-net-worth married couples have become a bit complacent when it comes to taxes and their estate plans. They assume nothing needs to be done until one spouse dies because the surviving spouse can use the deceased spouse’s available estate tax exemption. But if you want to include grandchildren in your estate plan, you can’t afford to put off planning for those transfers.

GST Tax Basics

Transfers to grandchildren (and others more than one generation below you) are generally subject to the generation-skipping transfer (GST) tax — on top of any gift or estate tax due. The GST tax rate is equal to the top estate tax rate, currently 40%.

There is a $5.43 million GST tax exemption, but it isn’t portable. So if you’re married and you put off planning for GSTs, your family could miss out on transferring $5.43 million — or more — GST-tax-free.

Trust Options

So how can you leverage your and your spouse’s GST tax exemptions? The solution may be a trust. A trust not only can preserve the exemption of the first spouse to die but also can ultimately shield much more than the GST exemption amount from transfer taxes, because growth on the assets within the trust is also protected by the exemption. In addition, it can benefit grandchildren without giving them unlimited access to the funds.

If you want the surviving spouse to still receive some benefit from the funds, a bypass trust might be the best option. Assets equal to the available estate and GST tax exemptions of the first spouse to die are transferred to the trust upon his or her death. Trust income is paid to the surviving spouse for the remainder of his or her life; the trust can be drafted to also allow some principal payouts in certain limited circumstances.

When the survivor dies, trust assets aren’t included in his or her taxable estate because they are sheltered by the first spouse’s exemptions. If the survivor received only income payments and the trust assets appreciated by 50%, nearly $8.15 million of assets would transfer estate- and GST-tax-free to the grandchildren.

If the surviving spouse won’t need access to the funds, a dynasty trust might be the best option. It can protect assets from transfer taxes for multiple generations.

Save More by Skipping a Generation

If you’d like to learn more about how skipping a generation can save your family taxes, please contact us. The rules are complex, but smart GST planning can help ensure more of your wealth stays in your family.

Read more from our Private Client Service Group. Questions? Contact us.