Plain English: Estate Planning Options to Reduce GST Tax

Plain English: Estate Planning Options to Reduce GST Tax

Who does GST Tax apply to?

The GST tax imposes a flat 40% rate on transfers—whether by gift, trust, or inheritance—to "skip persons," generally defined as individuals more than one generation below the donor (e.g., grandchildren) or unrelated individuals more than 37½ years younger.  Currently, the GST exemption amount is $13.99M and gifts in an amount less than $13.99M are not subject to either federal estate tax or GST tax. The tax applies in three scenarios:

1. Direct skips (outright gifts or bequests to skip persons),
2. Taxable terminations (interest in trust ends and all remaining interests are held by skip persons),
3. Taxable distributions (distributions from trust to a skip person during the trust term).

The Generation-Skipping Transfer (GST) Tax is an extra tax that applies when someone gives money or property to a grandchild or someone much younger, instead of passing it to their children first. The purpose of this tax is to stop people from avoiding estate and gift taxes by skipping a generation. The GST tax rate is high—40%—so it's important to plan carefully.

Here are the main ways this tax might apply:

1. You give a large gift directly to a grandchild.
2. A trust ends and everything in it goes to grandchildren.
3. A trust makes a payment to a grandchild during its term.

Everyone gets a lifetime exemption—$13.99 million in 2025 with an increase to $15M in 2026—that can be used to protect gifts or transfers from the GST tax. With the right planning, families can pass on more of their wealth to future generations tax-free.

Estate Planning Tools to Reduce GST Tax

1. Dynasty Trusts
   A dynasty trust can be set up to last for many generations. If you use your GST exemption when you create the trust, the assets in the trust can grow and be passed down without paying more estate, gift, or GST tax.
2. Annual Gift Exclusion
   You can give up to $19,000 per person in 2025 without using any of your lifetime exemption. If you give this amount directly to your grandchildren, the gift avoids the GST tax. You can also use a special kind of trust (with “Crummey” powers) that lets the gifts count as present interest gifts and qualify for the exclusion.
3. Reverse QTIP Election
   If you leave money to your spouse in a trust (called a QTIP trust), you can make a special election to keep the GST exemption for yourself. That way, the trust can still be protected from GST tax when it later benefits your grandchildren.
4. Gift Splitting and GST Exemption Limits
   Married couples can combine their annual gifts to give more to each person. But only the estate tax exemption is portable between spouses—not the GST exemption. That means if one spouse dies without using their GST exemption, it’s lost. Planning during life, such as giving to a GST-protected trust, helps avoid this issue.
5. Fixing Old Trusts
   If you have an older trust that wasn’t set up to avoid GST tax, it might be possible to “fix” it. This can involve using a legal process called decanting to change the trust terms or splitting the trust into parts that are protected and unprotected from GST tax.

The GST tax can take a big bite out of family wealth if it’s not planned for. But with smart estate planning—like setting up the right kinds of trusts and using your exemptions wisely—you can help your money last for generations. Since the current tax exemptions are in effect through 2029, it’s a good time to review your estate plan.

For Informational Purposes only and not for legal or tax advice.

About the Author – Marie Feindt, JD 

Marie Feindt is the Planning Specialist – Estate Attorney at Members’ Wealth, a boutique wealth management firm that offers a comprehensive and holistic approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of estate planning experience, Marie and the Members’ Wealth team thrive on bringing clarity and confidence to clients’ unique situations. She believes everyone, young adults and older, need the essential documents to conserve and preserve and transfer assets accumulated during lifetime to the next generation.

Marie received her JD from Widener University School of Law, her bachelor’s degree from Penn State University, University Park and is currently enrolled in the Villanova University Charles Widger School of Law Graduate Tax Program.

Marie is an Adjunct Faculty at the Villanova University College of Professional Studies Paralegal Professional Certificate Program where she teaches Estates & Trusts and Civil Procedure & Litigation and Torts & Personal Injury Law.

Marie volunteers for a monthly legal clinic at The Salvation Army in Chester, PA facilitated by the Christian Legal Clinic of Philadelphia. She has served on the Women’s Commission of Delaware County and as a Board Member for the Delaware County Literacy Council.

Marie enjoys biking, reading, yoga and walking in her free time with her husband and three children.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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