The generation-skipping transfer tax (GSTT) can be incurred by your estate if you bypass your children and give assets directly to your grandchildren. This tax, which is assessed by the IRS at a rate equal to the highest federal tax rate in effect at the time (currently 40%), is in addition to the federal estate tax.
Fortunately, there is a significant generation-skipping tax exemption, which is the maximum amount that can be directly transferred to grandchildren without the grandparents incurring the GSTT. The GSTT shares the same lifetime exemption as the federal and Minnesota gift tax exemptions. The federal exemption is $11.58 million per person, and the Minnesota exemption is $3 million per person.
Most estates are well within the exemption limits and grandparents can transfer significant amounts of cash and property without incurring the GSTT. However, if your estate is valued greater than the exemption amounts, you should seek the advice of an attorney or tax advisor.
There is an annual GSTT
exclusion, which is the same as the annual gift tax exclusion. As of 2020, you can give up
to $15,000 per person per year without incurring the GSTT. Married couples can give
double that amount, as they are each allowed to give up to $15,000.
There is an exception for grandchildren whose parents have predeceased them. In this case, the grandchildren effectively move up into their parents' place in line so the GSTT no longer applies to them. The inheritance is not skipping a generation.
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A qualified estate planning attorney can help you protect your assets for the future of your loved ones.