What if you could give your children assets in a trust and they could use them and yet they’d avoid estate taxation at their death? That’s what a “Generation-Skipping Transfer” Trust, or “GST” trust does. It is a trust which is designed to avoid estate taxation at the death of the beneficiary.
During the life of the beneficiary, the assets in the trust are used for their health, education, maintenance, and support. After the beneficiary’s death, the assets go to their own children. The beneficiary may be given a power to decide how the assets will be split among their descendants at their death. Yet, the assets still wouldn’t be included in the beneficiary’s taxable estate.
The beneficiary even could be their own trustee, or if it’s more appropriate (due to the beneficiary’s age or lack of financial maturity), someone else could be the trustee and manage the assets for them.
This type of trust could be the ideal trust for a beneficiary who might have a taxable estate at the beneficiary’s own death. While an individual doesn’t have a taxable federal estate until they exceed $11.4 million this year, this is only temporary until the end of 2025 when it is cut in half. Also, in some states an individual is taxed by the state if they have an estate over a lesser amount, such as $1 million.
The parents simply allocate some of their “GST” exemption at their death to this trust. This happens automatically in most cases.
Let’s look at an example: John dies and leaves $2 million to his daughter, Beth. Beth lives in Massachusetts which has a state estate tax after just $1 million. John leaves the assets in a GST trust for Beth. So, the $2 million Beth receives in trust from John won’t be included in Beth’s estate at her death. Beth, as trustee, manages the money and uses it for her own benefit during her lifetime. Beth dies years later with $1 million of her own money plus the money in the GST trust she received from John.
The money in the GST trust grew from $2 million to $3 million over the course of her life. It’s still all exempt from taxation in Beth’s estate. It saved Beth from being taxed at about 15% on the assets in the trust at her death. If Beth had a federally taxable estate, it would have saved even more.
A GST trust can be a good way to keep assets out of the taxable estate of the beneficiary, while still allowing the assets to be used for their benefit during life.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128