What Are Innovative Strategies to Handle Generation-Skipping Transfer Tax?

    Authored By


    What Are Innovative Strategies to Handle Generation-Skipping Transfer Tax?

    To navigate the complexities of the generation-skipping transfer tax, industry leaders from Founders to CPAs have shared their innovative strategies. Alongside these expert insights, we've gathered additional answers that provide a fuller spectrum of tactics. From leveraging life insurance trusts to applying valuation discounts in family entities, explore the diverse approaches recommended for this intricate aspect of estate planning.

    • Leverage Life Insurance Trusts
    • Maximize GST Exemption Utilization
    • Designate a CRUT for IRAs
    • Create Multi-Generational Dynasty Trusts
    • Use Annual Exclusion Gifts Strategically
    • Implement Trust Decanting Strategies
    • Utilize Perpetual State Trust Laws
    • Apply Valuation Discounts in Family Entities

    Leverage Life Insurance Trusts

    At Blue Insurance, we have adopted a unique approach to manage the generation-skipping transfer tax (GSTT) that has greatly benefited our clients. Recognizing the challenges and complexities this tax can impose, we have integrated strategic life insurance policies within our clients' estate planning. This method involves setting up life insurance trusts specifically designed to pay out directly to grandchildren, bypassing the clients' children.

    The payout from these policies covers any potential GSTT liabilities and ensures a tax-free inheritance for the beneficiaries. This strategy helps secure a financial future for the next generations and optimizes the clients' assets in a tax-efficient manner. By leveraging these life insurance solutions, we provide peace of mind to our clients, knowing their legacy is preserved and their loved ones are taken care of with minimal tax burden.

    Samuel Greenes
    Samuel GreenesFounder, BLUE Insurance of New Jersey

    Maximize GST Exemption Utilization

    The most effective way to minimize the Generation-Skipping Transfer Tax is for an individual to use ALL (or as much as possible, depending on net worth) of his/her GST exemption either during life or at death. While the estate tax exemption is portable (i.e., what isn't used at the first death can be used by the surviving spouse at his/her death), the GST tax exemption is not portable. This means that if the first to die doesn't allocate all $13.61 million of the GST exemption at his/her death, it is lost and unable to be used by the surviving spouse.

    There are two ways to ensure the GST exemption is fully utilized. First, balance the assets as much as possible between both spouses and set up the assets so that they pour into a trust FBO the surviving spouse. This will ensure that whoever dies first, his/her estate will be able to allocate as much of the GST exemption as possible to the trust. Additionally, by ensuring the assets are held in trust, the assets, so long as they stay in trust, will stay exempt from GST tax as they pass from generation to generation.

    Second, make large lifetime gifts. One strategy often used by high-net-worth families is a Spousal Lifetime Access Trust (SLAT). This trust is set up by one spouse for the benefit of the other spouse. The gifting spouse makes a large contribution to the SLAT (often maxing out the full $13.61 million), then files a Gift Tax Return to allocate estate AND GST tax exemptions to the trust. Not only does that remove the full amount of the contribution from the donor's estate, but it also shields the trust assets from estate and GST tax from generation to generation because the exemption was properly applied to the trust.

    David BrossSr. Estate Planner and Shareholder, Truepoint Wealth Counsel

    Designate a CRUT for IRAs

    One innovative strategy I've implemented to address the generation-skipping transfer tax is designating a Charitable Remainder Unitrust (CRUT) as the beneficiary for high IRA balances. This approach offers significant tax benefits by allowing beneficiaries to distribute the tax burden on inherited assets over a much longer period compared to the 10-year rule typically applied to IRAs.

    Moreover, this strategy extends the benefits of the CRUT beyond just the immediate children of the original account holder; it can also continue to provide financial support to grandchildren. The CRUT's structure ensures that the tax-exempt status is maintained, enabling assets to grow and be distributed in a tax-efficient manner. This not only helps in preserving family wealth across generations but also aligns with philanthropic goals, ultimately benefiting both the heirs and chosen charities.

    Michael Reeder
    Michael ReederCPA, Managing Partner, Reeder CPA Group

    Create Multi-Generational Dynasty Trusts

    Utilizing dynasty trusts can be an effective method for extending the period during which assets are shielded from generation-skipping transfer tax. By creating a trust that lasts for multiple generations, an estate planning attorney can help clients pass wealth directly to grandchildren or even later descendants while bypassing immediate heirs. This strategy not only preserves assets within the family but also maintains their growth outside the reach of hefty taxes that could otherwise diminish the estate's value over time.

    Moreover, these trusts can be structured to provide financial support to each generation without giving up the assets’ control to younger beneficiaries. Consider speaking with an estate planning professional to explore how dynasty trusts might benefit your long-term legacy planning needs.

    Use Annual Exclusion Gifts Strategically

    Estate planning can benefit from leveraging annual exclusion gifts in a strategy to pass wealth to subsequent generations without incurring generation-skipping transfer tax. By judiciously using the annual exclusion, an individual can gift a certain amount each year to grandchildren or other non-immediate descendants, thus reducing the taxable estate without triggering the tax. Over time, these gifts can significantly lower the overall estate value and associated taxes.

    The key is to have a structured gifting plan in place that methodically takes advantage of this exclusion. Consult with an estate planning attorney to establish a strategy that systematically maximizes this opportunity.

    Implement Trust Decanting Strategies

    A dynamic tactic in estate planning is the implementation of decanting strategies, which permit the transfer of assets from one trust to another. This flexibility can enhance how trusts respond to changing laws and family circumstances, allowing for the adaptation of trust provisions without the need for costly and time-consuming court proceedings. It's an underutilized yet powerful tool that can safeguard assets from generation-skipping transfer tax while adapting to beneficiaries' evolving needs.

    By redirecting the trust assets, attorneys can help clients maintain control and maximize the trust's benefits across generations. If your trust could use a modern update, consult with an estate attorney about the potential benefits of trust decanting.

    Utilize Perpetual State Trust Laws

    The incorporation of perpetual state laws in estate planning offers a pathway to circumvent the constraints often imposed by the generation-skipping transfer tax. These laws allow the creation of trusts that can last indefinitely, rather than being subjected to the 'Rule Against Perpetuities,' which traditionally limits the lifespan of a trust. By taking advantage of states with favorable trust laws, assets can remain protected from generation-skipping taxes for an undetermined amount of time, ensuring that wealth is safeguarded for subsequent generations.

    Such longevity in trust planning preserves family wealth and allows for continued asset growth without frequent tax interruptions. Reach out to an estate planner to discuss how perpetual state laws can fit into your estate's blueprint for the future.

    Apply Valuation Discounts in Family Entities

    Engaging in valuation discounts through family entities can be a sophisticated estate planning technique to handle potential generation-skipping transfer tax liabilities. By creating family limited partnerships or family LLCs, it's feasible to lower the taxable value of transferred assets due to various restrictions that decrease their market value. These entities enable the original owner to retain a level of control over the assets while benefiting from the tax advantages that arise from their lower valuation.

    This strategy importantly helps ensure that more wealth remains within the family and less is lost to taxes. To understand how valuation discounts might work for your estate, consider discussing this with a knowledgeable estate planning attorney.