Category: The Wealth Advisor

Your Guide to Understanding the Generation-Skipping Transfer Tax 

Generation-Skipping Transfer Tax 101 

Many people are familiar with the existence and some aspects of estate and gift taxes. If you are part of an ultra-high-net-worth family, it is important to also understand the generation-skipping transfer (GST) tax and how it may affect your particular situation. During the planning process, it is vital to consider unique family dynamics, financial goals, and values when deciding the best tax strategies to distribute your generational wealth.  

What Is the Generation-Skipping Transfer Tax?  

The government collects federal estate taxes to generate revenue when wealth is passed down to subsequent generations. When people die, they usually leave their money first to their spouses, then to their children, then to their grandchildren, and then to more distant relatives. At each passing of generational wealth, the government collects an estate tax.    

Wealthy families found a way to avoid estate tax by skipping a generation and transferring wealth directly to grandchildren and great-grandchildren, allowing them to pass down more wealth to future generations. Estate taxes were avoided when the skipped generation (in our example, the children) died because the children never owned the money or property.    

The government responded with legislation in 1976 and again in 1986, attempting to eliminate the transfer tax advantage of skipping a generation by imposing a GST tax when a skip occurs. This ensured that large estates still paid estate tax at each generation.

The GST tax rate is currently 40 percent (the same as the highest federal estate and gift tax rate) so the tax burden on high-net-worth individuals can be substantial. Luckily, there is a GST exemption amount of $13.61 million for individuals in 2024 (the same lifetime exemption as the federal estate and gift tax exemption) that can be used when someone wants to make gifts or leave an inheritance that would otherwise be subject to the GST tax. If you have a significant estate, your family may need to use their GST tax exemption in addition to the estate and gift tax exemptions.  

Who Are the Parties Involved in a Generation-Skipping Wealth Transfer?  

There are typically three parties involved in a generation-skipping wealth transfer:  

• The transferor: the person making the wealth transfer to an individual or a trust 
• The skip person: the person receiving the money or property, who must be two or more generations removed from the individual making the transfer or is at least 37 ½ years younger than the transferor; a skip person may also be a trust in some instances   
• The non-skip person or skipped person: the generation between the individual transferring wealth and the one receiving it  

Why Should You Be Mindful of This Tax?  

If you have a substantial estate and are considering making sizable gifts or bequests to skip persons, you need to work with experienced professionals to ensure that the right strategy is used to maximize your gift and minimize the tax consequences.   

The earlier you can get started, the better your results will be. It will take time and collaboration with trusted advisors to ensure the best possible outcome. After your estate plan is created, you will need regular reviews for updates due to changing circumstances.  

Professionals to Align Legal and Tax Planning Strategies  

You and your loved ones will need comprehensive advice when creating your estate plan to ensure that legal, financial, and tax implications are all considered in your estate planning strategy. We welcome the opportunity to collaborate with your existing advisors. When strategizing the best outcome for you, your loved ones, and your hard-earned money, it takes expertise from multiple areas to create the best plan possible. 

You may have considered creating a trust to transfer wealth to your grandchildren and great-grandchildren. But you may not have considered how the generation-skipping transfer (GST) tax could affect this inheritance. To better explain how the tax would impact a gift in trust, we are going to take a look at some math. 

Generation-Skipping Transfer Tax Rate   

The federal GST tax rate matches the highest federal estate tax rate, currently set at 40 percent. For high-net-worth individuals, effective GST tax planning is crucial in managing combined estate, gift, and GST tax burdens.  

Generation-Skipping Transfer Tax Exemption   

You can transfer a specific value of money and property to skip persons (grandchildren, great-grandchildren, other distant relatives, someone at least 37 ½ years younger, or a trust for a skip person), either during your lifetime or after death, before triggering the GST tax. This exemption equals the federal estate and gift tax exemption amount ($13.61 million in 2024). Be aware that there is no portability for the GST tax exemption. Meaning, you will need to use it or lose it.     

Exceptions to the Generation-Skipping Transfer Tax   

You and your family members may have already established a trust. If so, certain irrevocable trusts established before September 25, 1985, are grandfathered and exempt from the GST tax provisions in Section 26.2601-1(b)(1) of the Treasury Regulations. Modifications or additions to these trusts can jeopardize the exception. Additionally, gifts for educational or medical expenses to skip persons, such as Health and Education Exclusion Trusts (HEET), are excluded from the GST tax application.  

Calculating Generation-Skipping Transfer Tax  

To understand how the GST tax will affect the inheritance you leave behind, you need to do some math. The GST tax calculation relies on an inclusion ratio, indicating the extent to which a transfer is subject to GST tax. This ratio is determined by the applicable fraction, based on the amount of your GST tax exemption. An inclusion ratio of one means the direct skip or trust is fully taxable. Any number between zero and one indicates the transfer is partially subject to GST tax.   

The amount of the GST tax exemption allocated to the transfer is divided by the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:   

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable.   

Fully Exempt Trust  

Let’s say you create an irrevocable trust for the benefit of a grandchild and their descendants in 2024 when your entire GST tax exemption of $13,610,000 is available and you can allocate it to the trust.   

If you transfer $13,610,000 (or less) worth of accounts or property to the trust and allocate your entire GST exemption, the inclusion ratio would be zero:  

1 – (13,610,000 / 13,610,000) = 1 – 1.000 = 0  

The trust would be fully exempt from GST tax.  

Fully Taxable Trust  

Now, let’s assume that you have previously used your GST tax exemption and there was none available to allocate to your grandchild’s irrevocable trust, the inclusion ratio would be one:  

1 – (0 / 13,600,000) = 1 – 0 = 1  

The trust would be fully subject to GST tax. 

Partially Exempt Trust  

Partially exempt trusts have a portion of money or property subject to the GST tax, while another portion may qualify for an exemption.     

If you put $15,500,000 in the irrevocable trust, and your entire exemption was available, the inclusion ratio would be:  

1 – (13,610,000 / 15,500,000) = 1 – .877 = .122   

The applicable fraction is .878, and the inclusion ratio is .122. The trust would be partially subject to GST tax. When distributions are made to the grandchild, there will be a tax due. To calculate how much will be owed, we first must know what the tax rate is at the time of the distribution. For example, if the rate is 40 percent,

40 percent x .122 = 4.88 percent

If your grandchild receives a taxable distribution from the trust of $125,000, the GST tax would be $6,100.

For gifts or an inheritance left directly to the skip person, the formula works similarly, the inclusion ratio is multiplied by the GST tax in effect at the time of the transfer.

Tailoring Trusts for Success  

Working closely with your other trusted advisors, we can customize your estate plan based on your unique circumstances and goals. This also ensures compliance with federal and state tax laws, preventing a significant combined estate, gift, and GST tax burden that could diminish your family’s wealth and legacy over time.  

If you have significant wealth, things like estate, gift, and generation-skipping transfer (GST) taxes need to be discussed. If you want to make a gift or leave a large inheritance to a grandchild (while your child is still alive) a more in-depth conversation surrounding the GST tax, the impact it can have on the inheritance you leave behind, and the additional steps that may occur during the administration process after your death, will be warranted. Several different returns involve the GST tax. The appropriate form that needs to be filed with the Internal Revenue Service (IRS) will depend on the situation.  

What Is Form 709?

This form would be used when a client decides to make a gift to a skip person during their lifetime. Form 709 is used to report transfers that are subject to federal gift and certain GST taxes. This also includes the allocation of lifetime GST exemption to property transferred during the transferor’s lifetime. The IRS has provided instructions for the transferor to complete the form.

What Is Form 706-GS(D-1)?

Form 706-GS(D-1) is used for trustees of a trust to report distributions from a trust to a beneficiary that are subject to the GST tax. For additional assistance, the IRS has published instructions for completing the form.

What Is Form 706-GS(D)?

Form 706-GS(D) is used for skipped persons to report tax due on distributions made from a trust to them, that is subject to the GST tax. Like the other forms from the IRS, some instructions walk through the completion of the form.

What Is Form 706-GS(T)?   

Form 706-GS(T) helps your trustee and any other entities or responsible parties to calculate GST taxes and report what is due from certain distributions and terminations subject to the generation-skipping tax. It includes instructions for tax computation and separate sections for required information for the transferor (you) and the trust.   

You and your advisors can work together to develop a detailed list of documents and information required to determine the value of the money and property transferred to your trust or given outright as a gift or part of an inheritance.  

Understanding the complex calculations when applying the GST tax, exemption amount, and any exceptions is critical. This is where professional tax advice is essential. They can calculate the amount of the GST tax exemption allocated to wealth transfers by dividing the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:   

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable.  

Completing the Form  

To fill out the applicable forms, you need to gather a significant amount of information. Here is a list of information that may be needed:  

• The legal name of the trust and its federal tax identification number   
• Name and Social Security Number (SSN) or Employer Identification Number (EIN) of theindividual making the GST  
• A list of all beneficiaries, including their names and relationships to the transferor  
• The generation of each beneficiary in relation to the transferor (skip person or non-skip person)  
• Name and address of the trustee(s) responsible for managing the trust  
• A detailed list of all assets held within the trust, including values at the time of the GST 
• Appraisals of assets to determine their fair market values  

• Information about any other gifts or transfers made by the transferor during their lifetime that could be subject to the GST tax  
• Indication of how the transferor’s GST tax exemption will be allocated among the trusts  
• Allocations to skip persons, including any direct skips, indirect skips, or taxable terminations  
• Details aboutthe transferor or any beneficiary who is deceased  
• Copies of the trust agreement and any amendments  
• Any legal documents relevant to the GST  
• Specific dates of GSTs

Filing Deadlines  

Generally, these forms must be filed by April 15 of the year following the calendar year when distribution or termination occurred. Be organized and prepared throughout the year to provide accurate information. Maintaining clear records will streamline the process of completing the filing on time.    

Sailing Through Tax Season  

Working with your trusted advisors ensures accuracy and compliance with the GST tax rules. When we work together, we can provide you and your loved ones with the best possible service and help you protect the legacy you are leaving behind.  

What Is a Dynasty Trust and Why Should You Consider One?

If you have significant wealth, one of the best ways to protect your family and transfer your wealth is through a dynasty trust. However, setting one up requires considerable financial and estate planning knowledge. As experienced estate planning attorneys, we can explore all options available to protect your legacy and decide if a dynasty trust is right for you. 

Who Could Benefit from a Dynasty Trust?

If you have worked hard to grow your money, property, or business and want to create a lasting financial legacy for your family and future generations, creating a dynasty trust may be a great choice. Protecting your substantial wealth means addressing your specific concerns about taxes, potential creditors, lawsuits, or other financial risks while ensuring responsible management and distribution of money and property to your family. 

As a high-net-worth individual, you may need more complex estate planning strategies to achieve these goals. A successful estate plan is not just about transferring your wealth to the next generation. It is about sharing your vision for your family’s financial future along with setting certain guideposts for the management and distribution of wealth to ensure responsible financial stewardship.

How a Dynasty Trust Works

Creating and funding a dynasty trust should be done by an experienced estate planning attorney, often in collaboration with other professionals. Your team can guide you in deciding which cash, real estate, investments, or other valuable property should be transferred to the trust. You may be able to use your lifetime gift tax exemption to successfully transfer these items while minimizing tax consequences for yourself and your heirs in the future. Tax-efficient growth creates an even greater legacy for successive generations.

A dynasty trust is designed to be perpetual or of long duration. Unlike other trusts with limited or fixed termination dates, a dynasty trust will likely last for multiple generations and continue to accumulate and grow wealth over time.

A dynasty trust often involves appointing a professional trustee, such as a bank or trust company, to oversee the management and administration of the trust. They must follow specific terms and guidelines, ensuring responsible governance and distribution of money and property according to your wishes. These terms may include flexible distribution provisions to provide income to beneficiaries, an option for the trustee to make discretionary decisions based on specified criteria, or permitting the trustee to adjust distributions in response to changing family circumstances.

Why Would You Want a Dynasty Trust?

By placing money and property in a well-structured dynasty trust, you ensure that the wealth you have worked hard to accumulate remains protected within your family.

Life is unpredictable, and unforeseen circumstances, such as lawsuits, creditors, or divorces, can pose threats to your family’s financial stability. Since money and property are legally owned by the dynasty trust rather than any individual family member, they can be safeguarded from creditor claims and legal judgments in many cases. 

Estate taxes can significantly erode the wealth passed down to your heirs. Dynasty trusts are structured to minimize the impact of estate taxes over multiple generations. Additionally, the appreciation in value of trust resources while you are alive will occur outside your taxable estate, allowing for potential growth free from estate tax implications. 

Customized provisions in a dynasty trust can govern how money and property in the trust are managed and distributed. This level of control is particularly beneficial if you are concerned about a beneficiary’s financial acumen or spending habits. You can ensure that your wealth is managed responsibly while still providing for your family. 

If you have accumulated significant wealth and are looking for a way to create a lasting financial legacy for your family, we are available to discuss sophisticated estate planning tools, like dynasty trusts. By leveraging the benefits of perpetual duration, tax-efficient growth, asset protection, and responsible governance, you can address your family’s unique needs and goals over multiple generations. If you are interested in learning more about dynasty trusts and whether they are the right tool for you, give us a call.

Love Is in the Air: Have You Protected Your Loved Ones?

Valentine’s Day is approaching, when many people express just how much their loved ones mean to them by giving gifts and cards. But this year, you could try something different to show your love: think about your estate plan and how you can protect and provide for your loved ones. Preparation can help guide your loved ones through life’s challenges, and your love will be your legacy.

The New Year Has Begun 

The beginning of a new year is an opportune time to focus on family. A comprehensive estate plan can act as a roadmap, shielding your loved ones from uncertainties and providing peace of mind for both you and your family.

Protecting Relationships

Unmarried Partner

Today, it is common for adults to be in long-term committed relationships but be unmarried. If you have a life partner and are unmarried, it is imperative that you have an estate plan if you want your partner to receive your money or property at your death or if you want them to make financial or medical decisions on your behalf if you are alive but unable to make your own decisions. If you rely on your state’s laws, an unmarried partner will likely receive nothing at your death and will have no authority to make decisions on your behalf.

Spouse

Under most states’ laws, if a person does not have an estate plan, a judge usually chooses the spouse to make decisions for them if they cannot or to wind up their affairs when they pass away. The spouse is also typically given a large part of the person’s money and property if they die without an estate plan. However, a proactive and documented estate plan can help alleviate complications and misunderstandings among other family members. This is especially important in a blended family, where, for example, you may want your surviving spouse and children from a different relationship to receive your money and property at your death or you want an adult child to make medical decisions for you instead of your spouse. 

New Child or Grandchild

Welcoming a new family member is a joyous occasion, but it also comes with added responsibilities. Providing for a child or grandchild at your death in an estate plan involves nominating a guardian for your minor child and creating the terms for the inheritance you would like your child or grandchild to receive. By creating or revising your estate plan after the birth of a child or grandchild, you can help ensure the wellbeing and financial security and support the future aspirations of your young family members.

In-Laws

In-law relations such as a son-in-law, daughter-in-law, or parent-in-law may not typically be included in an estate plan, but you may want to leave an in-law relation something upon your passing. Alternatively, you may want your in-law to receive another family member’s inheritance if they predecease you or pass away before they have received their entire inheritance. By default, most state laws will not provide for an in-law if you pass away without an estate plan, so if this is your desire, you need to proactively plan for it. You should also reevaluate what you leave newly married family members in your will or trust, focusing on protecting their inheritance from their new spouse in the event of a divorce.

Protecting Your Family During Your Job Changes

Life is dynamic and so are your financial circumstances. It is essential that you update accounts and beneficiary designations with each job change or significant change in income. Failing to do so may have unintended consequences on life insurance policies, retirement accounts, flexible spending and health savings accounts, and more. Talk to your human resources benefits advisor to take an inventory of investments tied to your former employer and any new employer. Even if you have been at the same company for years, you should periodically check your beneficiary designations to make sure everything is up-to-date.

Estate planning is not a one-and-done task. It should evolve with changing circumstances. Regular reviews ensure that your estate plan aligns with changes in your relationships, financial situation, and life events. An estate plan is made up of documents that require accurate information to protect and provide for those you hold dear.

In February, the month of love, take the time to create or revisit your estate plan. Through thoughtful planning, you can continue to express love and care for your family, even after you are gone. If you have any questions or would like to review your existing estate plan, give us a call.

As your trusted estate planning attorney, if we do not have an immediate answer or solution for you, we can often get one by contacting another attorney or advisor who works in an area that falls outside of our expertise—a vetted professional that we have developed working relationships with or perhaps your trusted advisor who can be brought in to enhance the services provided to you. 

When this happens, we must adhere to specific ethical guidelines, including those outlined in the American Bar Association’s (ABA) Code of Professional Conduct Rule 1.6, regarding client confidentiality and obtaining informed consent before disclosing information related to your planning. According to ABA Model Code Rule 1.6, “[a] lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent.”

Attorney-Client Privilege 

You are surely familiar with attorney-client privilege—confidential communications between you and your attorney stay between you and your attorney. This is one of the oldest legal privileges, with boundaries respected by the courts. However, there are times when attorney-client privilege is waived, such as when information is shared outside of the attorney-client relationship. 

Lawyers often include other individuals as part of their “team,” specifically to provide the best and most comprehensive representation to their client. For example, lawyers may often seek out a trusted accountant, tax advisor, financial planner, or insurance agent to help translate complex financial information, tax strategies, or policy information for advanced estate planning. However, when these individuals are brought in, we want to make sure that you are informed and protected.

The Third-Party Waiver Form

In situations where nonclients, including your family members and advisors, are integral to the estate planning process, we may ask you to sign a third-party waiver form. This form serves a dual purpose:

1. It allows us to share confidential information that is otherwise protected by the attorney-client privilege with relevant third parties to complete the estate planning process.
2. It allows third parties to be present during our estate planning meetings where sensitive details are discussed. 

The third-party waiver is not only an ethical requirement but it also serves as a practical tool for permitting effective communication and collaboration among various experts. This can help to cultivate a comprehensive and transparent approach to estate planning. By seeking informed consent through the third-party waiver, we adhere to legal and ethical standards that prioritize your best interests.

Knowing What to Expect from Your Estate Planning Attorney

If you are ready to start the estate planning process and have other trusted advisors you feel would help the process, you can expect to sign a third-party waiver form. Your privacy is of the utmost importance. 

If you want to include family members or friends in your estate planning meetings, you will need to sign a waiver permitting us to share your private planning information with them as well. In some instances, we have found it helpful to include family members in a meeting once the estate plan is complete, especially if those individuals have been given a role as an executor, trustee, or agent under a financial or medical power of attorney. We will explain what their roles involve and your intentions for them in decision-making processes. We can be there to provide them with advice and support and navigate tough conversations if needed. 

We are your attorneys, and it is our responsibility to represent you and your interests. In some areas of the law, this may mean excluding people; however, in estate planning, it may be to your benefit to include outside professionals, family members, or loved ones. Regardless of the situation, we are here for you to ensure that you have an estate plan that is comprehensive and carries out your wishes.

In addition to being considered the month of love, February is International Networking Month. In today’s world, developing new relationships with people is truly important. Our social and professional interactions contribute to our overall health and mental well-being. Many people work remotely or live far away from their friends and family and often engage with others online rather than in person. This can make it hard to make new friends or find colleagues with common interests. We need to make the time and put in some effort, and that is where networking comes in.

What Is Networking?

Networking involves attending in-person and online events to find people who can offer insights, opportunities, guidance, and support for business or personal endeavors. Whether you want to find people who share your hobbies, a lunch date, a travel companion, or a professional who understands your specific challenges at work, your networking community can add value to your life. 

Networking can be a strategic business activity or a social gathering. You can plan your own event or attend someone else’s based on a personal or professional goal. Who do you want to meet and why? From LinkedIn business communities to Meetup.com, networking sites have many ways to help you find “your people” and offer opportunities to meet virtually or face-to-face.

When Do You Network?

Networking helps you expand your circle of friends or peers. You might feel lonely, want to learn something new, need a break from your routine, or simply want to be in a room with like-minded people. Search for specific events and activities that speak to you and meet your criteria for locations and times. Check the profiles of online participants and comments about the group to determine if it interests you. If you cannot find exactly what you are looking for, create a group describing the types of people you want to meet and the activities or interests you want to explore. Then set up a time and place to see if other people in your area are willing to meet. 

Online networking sites introduce you to many communities and individuals you can build relationships with over time. You can control the level of interaction you are looking for, whether it is to attend a casual cocktail hour with 50 people or schedule a meeting with one individual for coffee.

What qualities are you looking for in the people you will meet? How far do you want to travel to meet them? What interests do you want to share? Get started and work to establish connections that enhance your quality of life. You may find that you develop many lasting friendships or relationships with referral sources.

Networking Is a Worthwhile Endeavor

It takes time to find people who have the qualities you enjoy, whether in personal or business relationships. Get comfortable with introducing yourself to others. If you are a bit introverted, start with smaller networking groups, bring a friend, and spend more time listening before jumping in. Seasoned group members are often happy to introduce themselves and help new people feel comfortable. 

You may have to try multiple networking events before finding the right fit. Once you do, commit to this social exercise. Building valuable relationships requires gravitating to people you can appreciate for their personality, skills, or knowledge.

In a world where family members live in different states and most interactions are virtual or remote, we need to discover new ways to meet people and connect on a deeper level. A sense of community brings people together. Networking offers an opportunity to give and receive love and support in a variety of ways. Give networking a try!

As we begin 2024, it is crucial to review estate planning goals and strategies that may be affected by changes in the federal estate tax exemption law. At the end of 2025, the Tax Cuts and Jobs Act (TCJA) the estate tax exemption, which is $10 million, adjusted for inflation, may revert to the pre-2017 exemption amount, cutting it almost in half. Depending on the types of accounts and property you own, you may need to pay close attention to their value.

You may need a complete reevaluation of your most significant investments and property to ensure that they are protected. The following items may have steadily increased in value over time, potentially creating major estate tax issues:

• Business interests
• Life insurance
• Real estate

For people with significant wealth, each of these items alone may not put you over the estate tax limits, but the combination could. 

Your Business

With the uncertainty surrounding the estate tax exemption, developing a comprehensive business succession plan is crucial, especially if your goal is for the business to continue on after you have retired or passed away. Consider strategies such as gifting shares to the next generation or creating a family limited partnership. 

The last thing you want to do is sell your business or farm that may have been in your family for generations (if farming is your occupation) to satisfy a looming estate tax bill. Not only would this be a financial and emotional loss, but it may also result in the loss of jobs for your family and other employees. 

Your Life Insurance Policies

Life insurance policies may be an essential part of your estate plan. Review your life insurance policies to ensure that they are used effectively for your estate planning goals with the federal estate tax exemption in mind. Increasing policy values could put you over the potentially lower lifetime exemption limit. Consider the following:

• You need to determine how much life insurance to purchase. By meeting with an experienced insurance agent and financial planner, you can ensure that you have the right amount of coverage to adequately plan for your loved ones.
• The ownership of the policy can affect estate tax liability. Transferring ownership of the policy to an irrevocable life insurance trust (ILIT) may allow you to remove the value of the policy from your estate and protect the death benefit on behalf of your chosen beneficiaries.

Multiple Real Estate Properties

Real estate can pose specific challenges in estate planning. Reassess the current value of your properties to ensure accurate tax planning, keeping the potential decrease in the estate tax exemption in mind. Depending on the economic climate, your real estate may be far more valuable than when you first acquired it. You might consider using trusts, such as qualified personal residence trusts (QPRTs), to transfer real estate to heirs while minimizing estate tax exposure. You might also consider creating an entity, or multiple entities, to own the real estate. This strategy may be able to offer additional asset protection for you and your loved ones.

Stay Informed with the Help of Professionals

The estate tax landscape is evolving, and it is important that your estate plan stays up to date. We would love to collaborate with your trusted financial and tax advisors to update your comprehensive estate plan. Your situation and family dynamics are unique, and your plan must be customized to your specific circumstances to adequately protect your property and minimize potential tax liabilities well before the estate tax exemption sunsets at the end of 2025.