The tax law that went into effect in 2018 temporarily raised the lifetime exclusion for estate, gift and generation-skipping taxes to over $11 million per person. The higher exemption, which adjusts for inflation while in effect, sunsets at the end of 2025.
That means, for the next six years, each person can gift or transfer up to $11.4 million without having to pay federal gift or estate taxes. That amount doubles for couples, and can be combined with the annual gift exclusion, which allows you to give $15,000 in 2019 to any number of people without reducing your federal lifetime gift tax exemption.
In effect, federal estate taxes will be rendered moot for all but the wealthiest of Americans. But the tax is steep on the amount that exceeds the limit: 40%. Note that the generation-skipping transfer (GST) tax, imposed at a 40% flat rate, is in addition to gift or estate tax, depending on whether the transfer is made during life or at death.
Of course, when it comes to financial planning, taxes should take the backburner to achieving your goals, but they should be considered. Especially now that you have an opportunity to transfer more wealth to your family through existing or newly formed irrevocable trusts, including generation-skipping trusts.
One strategy is the generation-skipping trust, which bypasses your immediate children in order to benefit your grandchildren even more down the line. There are three key reasons to do so:
Estate and tax planning is complicated; layering on temporary rules that may or may not be made permanent dials up the complexity when it comes to navigating federal estate, gift and generation-skipping transfer taxes as well as state estate or inheritance taxes. You’ll want expert guides – your advisor, accountant and lawyer come to mind – to help you take maximum advantage of the generation-skipping transfer tax lifetime exemption.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Raymond James does not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional.
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