Estate Tax and Generation Skipping Tax and Estate Planning

By: Kathy Bach

ESTATE TAXES

The estate tax is designed to tax assets at a person’s death which are in excess of the exemption. In 2026, the gift/estate tax exemption is $15,000,000 indexed for inflation per person or potentially $30,000,000 for a married couple.

The gift and estate tax exemptions are tied together.  Whatever lifetime gifts you make reduce your estate tax exemption at death except annual exclusion gifts (currently $19,000 per person per donee) and charitable gifts.

The gift and estate tax rate is 40% of the assets that exceed the exemption.

GENERATION  SKIPPING TRANSFER TAX

The purpose of the generation skipping transfer (GST) tax is to limit the amount of wealth that can skip a generation or be held in a trust that continues for multiple generations without paying estate tax whether given during life or at death.  Prior to this tax, it was possible to pass an unlimited amount of assets to a trust for the benefit of multiple generations, thus permanently avoiding estate taxes as each generation passed away.

The GST tax exemption currently mirrors the estate tax exemption of $15,000,000. Our planning typically takes advantage of the GST exemption but avoids the payment of any GST tax. 

PLANNING FOR A SINGLE PERSON

For a single person with significant assets, we often recommend that he/she leave their assets in a GST Trust for each of their children. A GST Trust does not skip your children, it provides benefits for their lifetime and then passes to the next generation.

The purposes of doing so are the following:

• The assets in the GST Trust avoid estate tax at the child’s death and can continue in trust for the child’s children and future generations.
• The assets in the GST Trust are generally protected in the event of divorce (although the existence of the trust may impact maintenance and the division of marital assets).
• The parent can control how the assets are distributed to their child if desired and can provide where the assets pass at the child’s death (for example, to their grandchildren instead of the child’s spouse).

The amount that can pass to the trusts for the children or other beneficiaries can total up to the exemption amount (currently $15,000,000).  Assets in excess of this amount would typically pass to the children outright or to Non-Exempt Trusts for their benefit.  The main difference between a GST Trust and a Non-Exempt Trust is that the assets of the Non-Exempt Trust will be included in the child’s estate at the child’s death. 

PLANNING FOR A MARRIED COUPLE

When planning for a married couple, we want to take advantage of both spouses’ estate tax exemptions and GST tax exemptions in larger estates.  At the death of the first spouse, the deceased spouse can either use his/her exemption or it can be transferred to the surviving spouse to use at his/her death (this is called portability). However, the GST tax exemption cannot be transferred so if a couple’s estate exceeds the current exemption of $15,000,000, then we want to divide the assets into two trusts at the first spouse’s death to make sure we can use both spouses’ GST tax exemptions. 

A typical plan would provide that at the first spouse’s death, the assets would be divided as follows:

• The deceased spouse’s exemption amount would pass into an irrevocable trust known as the Family Trust. The Family Trust is for the surviving spouse’s benefit for their lifetime.  This Trust will be exempt from both the estate tax and GST tax when the surviving spouse dies no matter how large it is at that time.  However the asset of the Family Trust do not get a new basis at the surviving spouse’s death.
• The remaining assets pass into a Survivor’s Trust which is a revocable trust for the surviving spouse. At the surviving spouse’s death, assets equal to the surviving spouse’s exemption will escape estate tax but any excess will be subject to tax at the rate of 40%.
• GST Trusts for the children will be funded with the Family Trust assets and assets equal to the surviving spouse’s GST exemption amount.
• Any excess assets of the surviving spouse will pass either outright to the children or to Non-Exempt Trusts for their benefit.
• If a couple’s assets are more than one exemption but significantly less than two exemptions, we provide for an option where a QTIP Trust is funded instead of the Family Trust (or some combination of the two). The QTIP Trust still uses the deceased spouse’s GST tax exemption but gets a new basis at the surviving spouse’s death.  However if the assets have grown significantly this could result in an estate tax so it must be carefully considered.