Authored by RSM US LLP
Executive summary
Use it or lose it – your increased available generation-skipping tax (GST) exemption is set to expire Dec. 31, 2025. Planning for the sunset now will help save your loved ones from paying unexpected generation-skipping transfer tax (GSTT).
Strategies for maximizing your generation-skipping transfers under the current law
Your advisors have likely been shouting from the rooftops about the importance of using your available increased estate and gift exemption that is set to sunset on Dec. 31, 2025. You may have already listened to their advice and made significant gifts to take advantage of this unique ‘use it or lose it’ opportunity.
Equally as important, though not as often talked about, is the generation-skipping tax (GST) exemption, which was also doubled ($13.61 million in 2024) and is likewise expected to be reduced significantly at the end of 2025. While 2025 is set to see another inflation adjustment to the estate, gift and GST lifetime exemptions they will soon be cut in half (adjusted for inflation), unless Congress acts.
Currently, the generation-skipping transfer tax (GSTT) is a flat tax rate of 40%. The GSTT is separate from, and in addition to, gift tax and estate tax. Likewise, GST exemption is separate from, and in addition to, your estate and gift exemption. You can use your available GST exemption when you make transfers to individuals or in trust that will or could benefit skip persons (i.e., individuals that are two or more generations younger than you). This includes gifts to grandchildren, great-grandchildren, or gifts to a trust that may benefit grandchildren and great-grandchildren. The GST exemption can be applied to transfers made during your life and at death to protect those assets from the GSTT. Proper planning may help avoid a 40% GSTT liability.
The IRS has issued regulations stating there will be no GST exemption claw back for gifts made between 2018 and 2025, meaning if you take advantage of the increased exemption before the end of 2025, your estate will not owe estate tax or GSTT after those exemptions are decreased by half after the sunset. This limited GST exemption increase provides individuals with even more opportunities to meet their estate planning goals.
Below is an example of GSTT planning before the sunset at the end of 2025:
By December 2024, you used your entire lifetime gift tax exemption of $13.61 million, but still have $4 million of GST exemption left. After the sunset on Dec. 31, 2025, you will have no remaining GST exemption. You are considering leaving assets to your grandchildren at your death. If you died after 2025, a $4 million transfer to your grandchildren would trigger the 40% GSTT.
If you instead make a gift of $4 million to create a trust for your grandchildren before 2024 ends, you could potentially save $1.6 million (40% of $4 million) of GSTT. The 2024 exemption applied to the 2024 transfer protects the assets from the GSTT. If distributions are made from the trust to your grandchildren, there will be no related GSTT. Since you had already used your entire lifetime gift exemption, this $4 million gift will cause a 40% gift tax liability. This may sound bad, but it is actually an additional estate planning success story for a couple reasons.
First, the $1.6 million gift tax paid during your life is an additional asset you successfully removed from your estate. If that $1.6 million had stayed in your estate, the estate tax on that cash alone would be $640,000 without factoring in potential appreciation. Second, the $4 million transferred to the trust for your grandchildren will most likely appreciate as well. If the $4 million appreciates to $6 million during your lifetime, you saved another potential $800,000 in estate taxes by gifting before the appreciation occurred and allowing the appreciation to happen outside of your estate. By utilizing your remaining GST exemption in 2024, you effectively achieved your goal of transferring assets to your grandchildren, moved more money out of your estate and saved both GSTT and estate taxes.
There are additional planning strategies to consider when determining how to best use your remaining GST exemption. This includes making a late allocation of your available GST exemption to an existing trust that is currently not protected from the GSTT.
Please note that unlike unused estate and gift exemption, the GST exemption is not portable between spouses, meaning it can generally only be used by the person it belongs to during their life or at their death. Further, your GST exemption can generally only be applied to transfers where you were the transferor for GSTT purposes. If you want to take advantage of the current increased GST exemption, you may want to consider making some lifetime gifts for the benefit of your grandchildren or other skip persons before the end of 2025. Consult with your Hood & Strong tax professional and estate planning attorney to discuss protecting your assets from the GST.
