Estate planning often aims to achieve much more than simply designing a road map for the division of estate assets after death. Most estate plans, for example, also include tax avoidance strategies and tools. In fact, in years past creative estate planning was commonly used to pass down family wealth without incurring a substantial tax liability in the process. Uncle Sam finally started to catch on though and eventually implemented the Generation Skipping Tax, or GST, to make sure all transfers were ultimately taxed.
Just a couple of generations ago, crafty estate planning was used to pass huge estates down through families by creating life estates. The patriarch of the family would create a life estate for the children and then a new one was created for grandchildren and on down the generations. Because a life estate was not subject to gift and estate tax, the family wealth was passed down without ever paying gift and estate taxes. Creative use of trusts was also an estate planning technique that was widely used to avoid the payment of estate and gift taxes. By 1976 Uncle Sam was tired of missing out on its share of estate taxes and introduced the GST as a way to ensure that taxes were paid on the transfer of wealth in whatever form. The original GST was widely criticized, causing it to be repealed and replaced in 1986 with the current version.
The generation skipping tax is a rather complicated tax in an already complex tax system. Remembering the purpose of the tax helps — the purpose of the GST is to tax transfers of wealth that managed to slip through and not incur gift and estate taxation. The lifetime exemption that a taxpayer is entitled to for purposes of figuring gift and estate taxes applies to the GST as well, meaning that for 2014 a taxpayer may exempt $5.34 million before the GST could be imposed.
The GST tax is one of those taxes that can sneak up and throw a serious “monkey wrench” into an estate plan if you did not consider the tax ahead of time. For this reason, it is always best to consult with an experienced estate planning attorney before setting up trusts, life estates, or any other transfer of wealth.