Question 1: What is the GST?
GST stands for generation-skipping tax, or sometimes as it is referred to, the generation-skipping transfer tax. It is a federally imposed tax that applies when people transfer wealth from one generation to another that is at least two generations removed. Essentially, this means it applies when grandparents give gifts to their grandchildren or great-grandchildren.
Question 2: How does it work?
The GST is similar to both the estate tax and the gift tax. When the grandparent transfers wealth after he or she dies, that transfer can be subject to the estate tax if it is over the exemption limit. Similarly, grandparents who transfer wealth to their family while they’re still alive by giving gifts can also be taxed through the gift tax if such gifts are also over the exemption limit.
Question 3: When does it apply?
The GST is designed to apply in instances where grandparents try to skip or avoid paying estate taxes. For example, a grandparent typically leaves an inheritance to a child. If that inheritance is over the exemption limit, it is subject to the estate tax. Then, when the child dies and leaves that inheritance to his or her own child (the grandchild), that too is subject to estate tax. The GST applies when the grandparent tries to avoid the first estate tax fee by transferring the inheritance directly to the grandchild.
Question 4: Do I have to worry about the GST?
Probably not. It only applies in very limited circumstances and only to estates of significant worth. However, the exemption limit is likely to change significantly in the coming year, so you may need to consult your estate planning attorney to see if the new limit now applies to you.