Generation-Skipping Transfer (GST) trusts have long been a popular estate tax planning tool used to defer transfer tax to a future generation. While the estate tax exemption is at a historical high, the GST tax exempt status of existing trusts is still important when planning for a family’s overall tax situation. Trusts established by a parent or grandparent can be qualified as GST exempt or GST non-exempt trusts, depending on whether the creator’s GST tax exemption was allocated to the trust. Any distribution from a GST non-exempt trust to a grandchild (or more remote descendant) will be subject to GST tax at a 40% rate, regardless of whether the distribution is made during the term of the trust or upon the termination of the trust. This GST tax can apply even if the beneficiary’s estate is not otherwise subject to estate tax.
There may be planning opportunities to minimize or avoid GST tax on a distribution to a grandchild from a GST non-exempt trust, either through a late allocation of GST exemption, application of the predeceased ancestor rule, exercise of a special power of appointment or addition of a general power of appointment. Timing is important, as some of these planning opportunities are only available while the trust creator or an older beneficiary is alive.