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Can You Skip Over The Special Tax For Generation-Skipping?

You may already know about the potential tax consequences of transferring part of your estate to your children, either through a gift while you're alive or a provision in your will. But there's also a special rule for gifts that skip a generation—for instance, if you give cash or property to your grandchildren. That can trigger a special "generation-skipping transfer" (GST) tax. The GST tax is subject to the same tax rates that apply to other gifts.

The GST tax was designed to ensure that the wealthiest families wouldn't sidestep estate and gift taxes by moving assets to someone two or more generations younger. It applies to most direct transfers and to certain indirect transfers, such as those made to a trust that designates your grandchildren or great-grandchildren as beneficiaries.

This tax has been around since 1987. But many people don't know it exists until they find out they must pay it. In most cases, however, a generous GST exemption can help you avoid this tax.

For 2016, the GST exemption is $5.45 million, the same amount that's exempt from estate taxes. As a result, it's often still possible to create a "dynasty trust" spanning multiple generations without any dire tax consequences by using the estate tax and GST tax exemptions. Such a trust may go on indefinitely.

Does this affect your personal situation? More information about the GST tax is available upon request.