Planning With Trusts That Are GST Exempt

Tax Professionals' Resource
August 14, 2013 — 1,867 views  
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When your wealth is passed down from you to your children, in other words the next generation, you are liable to pay a certain amount of tax. The same wealth when passed down further from your children down to their next generation, taxes will be further deducted at this stage as well. The GST or Generation-Skipping tax exempt trust helps avoid this process of being doubly taxed. When the wealth is transferred to a trust, the assets can benefit some or all descendants without double taxation.

Common Factors for Planning

Before the introduction of GST, when people transferred their wealth to their children, it would attract a gift tax (if you transfer it during your lifetime) and then when it would be further transferred down to the next generation. The latter would attract an estate tax (if you transferred after death). In order to avoid double taxation, people began transferring their wealth directly to their grandchildren, which did not attract double tax but only a single estate tax.

In order to avoid losing out on taxation, the GST tax was introduced. It imposes a transfer tax on your transfer to your grandchildren at the highest estate tax rate.

The Generation Skipping tax exempt planning permits one to transfer wealth into a trust. This trust can be used to benefit some or all descendants. Under the current federal tax laws, the assets will not be subject to further gift or estate tax as long as they remain in the trust.

How Many Generations can be Exempt?

If your estate plan has established a GST tax exempt trust, there could be two possibilities. Firstly, upon the death of your children, the GST trust would terminate and the assets would be distributed to your grandchildren. Under this arrangement, the assets wouldn’t be subject to estate tax. Once distributed however, they would now belong to your grandchildren. If passed down further the wealth would attract gift or estate tax as applicable.

The other alternative is you let the assets remain in the trust for another generation, for your grandchildren’s lives. Upon their deaths, the assets would be distributed amongst your great grandchildren. When the trust is terminated and the assets distribute, it would not attract gift or estate taxes. In this manner, you could avoid taxation for another generation.

Other Considerations

The rule against perpetuities is a consideration one must adhere by when establishing a trust and planning for a generation skipping tax exempt. The Rule against perpetuities helps explain how long a trust will last. Most states claim they could last up to100 years. However, as per this rule it would depend upon the lifetime of a person and is therefore variable. In the state of Delaware however, one can have an established trust for as long as one desires. There is no limit to the number of years within which a trust must be dissolved; therefore one can save on estate taxes.

The Rule against perpetuities also prevents a person from putting qualifications and criteria in his/her will that will continue to control or affect the distribution of assets based on the GST long after he or she has died.

Tax Professionals' Resource


When your wealth is passed down from you to your children, in other words the next generation, you are liable to pay a certain amount of tax. This article explains how to plan out your trusts to get the most out of non-taxation.