Please check my thinking on estate and GST taxes

[SecondCor521]

Hi all,

Suppose you have three generations: grandparent who is very well off, kid who is well off, grandkids who are just starting out in life. Assume for the sake of this discussion that grandkids are more than 37.5 years younger than grandparent; i.e., they are skip persons.

1. If grandparent's estate is above the exemption amount, then grandpa's estate pays estate taxes at 40% on those excess dollars. Also, any amount left to grandkids is subject to GST, so there is also GST tax at 40% on those dollars. So grandparent to grandkid dollars end up at 20 cents per dollar. Right?

2. If grandparent's estate is below the exemption amount, then there is neither estate nor GST taxes and grandparent to grandkid dollars end up at 100 cents per dollar. Right?

3. So it would seem that the advisability of grandparent to grandkid transfers is, among other factors, highly dependent on whether grandpa's estate is above or below the exemption amount. Right?

4. I know estate taxes are paid from grandparent's estate. GST taxes are also paid by grandparent's estate, right?

 

[cathy63]

0. Did the grandparent have a spouse who died, and did they file a return electing portability of the spouse's exemption? If so, this would mean the grandparent's exemption is higher than you might think.

1. I think your calculations are correct, but this doesn't necessarily affect the grandkids directly. If the grandparent's will says that grandkids get $1M each, the estate tax and GSTT are paid by the estate, then the $1M is distributed to each grandchild. Whatever's left goes to the remainder legatees. I am not sure what happens if the grandparent's will says "50% to my son and 50% to be divided among my grandchildren."

2. Yes.

3. Yes. The idea is that the "normal" path for inheritance is to the child and the child leaves funds to the grandchildren. If the parent predeceases the grandparent, then there's no GSTT assessed.

4. Yes.

 

[Katiek]

Interesting Thanks for the info cathy63.



The transfer has to skip a generation, not just an heir, right? So a single person with an estate above the limit and no children could give a bequest to a niece without raising the issue (rather than giving the bequest to a sibling who is the niece's father) ? But the issue would come up if the bequest was to the niece's children?

 

[SecondCor521]

0. Did the grandparent have a spouse who died, and did they file a return electing portability of the spouse's exemption? If so, this would mean the grandparent's exemption is higher than you might think.

1. I think your calculations are correct, but this doesn't necessarily affect the grandkids directly. If the grandparent's will says that grandkids get $1M each, the estate tax and GSTT are paid by the estate, then the $1M is distributed to each grandchild. Whatever's left goes to the remainder legatees. I am not sure what happens if the grandparent's will says "50% to my son and 50% to be divided among my grandchildren."

2. Yes.

3. Yes. The idea is that the "normal" path for inheritance is to the child and the child leaves funds to the grandchildren. If the parent predeceases the grandparent, then there's no GSTT assessed.

4. Yes.

cathy63,

Thanks for replying. In answer to your questions in #0, the other grandparent died, but sadly the DSUEA was not timely elected. So the surviving grandparent has only their own exemption amount.

As far as #1, I understand your point. In this scenario (which is more complicated than outlined in my OP), the fact that it is grandparent's estate paying both taxes still means less money in aggregate left for the collected heirs. Without getting into all the gory details, if money is left to grandkids in one branch but not others, then the GSTT imposed on the estate would mean less money for the kids in the other branches, which would not be fair and would have to be accommodated.

My understanding of the 50% scenario you described is that the exemption would be applied to the 50% to kids amount, and any leftover exemption would be applied to the 50% to grandkids amount. But I'm not sure on that.

Understood on #3.

Thanks for the "Yes" answers. They're helpful!

Interesting Thanks for the info cathy63.

The transfer has to skip a generation, not just an heir, right? So a single person with an estate above the limit and no children could give a bequest to a niece without raising the issue (rather than giving the bequest to a sibling who is the niece's father) ? But the issue would come up if the bequest was to the niece's children?

Skip persons are anyone who is 37.5 years younger, so in your scenario I think the only thing that matters is if the niece is 37.5 years younger than the transferor (the original person with the large estate).

The only time that generations actually come into play is where all the intervening relatives are deceased, as cathy63 mentioned above. Then the successive generations move up a level.

So if the niece were 37.5 years younger and both her parents (I think) were deceased, then she would no longer be a skip-person. I think.

 

[Texan1636]

Hold on a minute. Is Question 1 in the OP assuming that you don't have a separate GST exemption amount? I'm not an estate planning attorney, but my understanding (from my own estate planning) is that I currently have (1) a $11.7 million lifetime estate tax exemption/exclusion amount AND (2) a $11.7 million lifetime GST tax exemption/exclusion amount. So, if my estate is, just to pick a number, worth $15 million, and absent any other planning tactics to reduced taxes at death, $3.3 million of my estate would be subject to estate tax, regardless of how I may divide up gifts between my child and grandkids. I can give money to grandkids up to $11.7 million (including to trusts for the grandkids) without my estate being subject to any GST tax, because I would allocate as much of my lifetime GST tax exemption as needed to cover those gifts.

 

[Letj]

Texan1636. That’s my understanding too and for a couple twice that amount in exemption. I am curious what happens if the spouse remarries and assuming the new spouse doesn’t have much of an estate. Do they still maintain the $24 million in exemption?

 

[Texan1636]

Letj, my understanding is that the estate tax and GST tax systems take different approaches to the question you are raising. For estate tax purposes, any portion of the exemption amount not used by the first-to-die spouse can get used by the surviving spouse as long as an estate tax form is filed after first spouse's death to elect "portability." However, if the surviving spouse remarries, and the new spouse dies before the surviving spouse, I understand that the surviving spouse gets the unused exemption amount of the most recently deceased spouse, however much that may be. There is no portability for GST exemption, so if a couple is wealthy enough to have to worry about it and they plan to make current or contingent (in trust) gifts to grandkids, they need to structure their estate so that the GST exemption amount for each spouse gets allocated to gifts made prior to or at their deaths - surviving spouse can't utilize unused GST exemption amount of deceased spouse. This may become more important for some people if the estate and GST exemptions go down to $6 million or so, as currently proposed and as would happen automatically in 2026 if Congress takes no action.

 

[SecondCor521]

Hold on a minute. Is Question 1 in the OP assuming that you don't have a separate GST exemption amount? I'm not an estate planning attorney, but my understanding (from my own estate planning) is that I currently have (1) a $11.7 million lifetime estate tax exemption/exclusion amount AND (2) a $11.7 million lifetime GST tax exemption/exclusion amount. So, if my estate is, just to pick a number, worth $15 million, and absent any other planning tactics to reduced taxes at death, $3.3 million of my estate would be subject to estate tax, regardless of how I may divide up gifts between my child and grandkids. I can give money to grandkids up to $11.7 million (including to trusts for the grandkids) without my estate being subject to any GST tax, because I would allocate as much of my lifetime GST tax exemption as needed to cover those gifts.

OP here.

Question 1 isn't assuming that. It's asking that.

My understanding is that you have a single $11.7M unified gift/estate/GST exclusion amount. So if your estate was $15M, then $11.7M of that would pass (federal estate) tax free to your heirs. The additional $3.3M would have estate tax owed on it at 40%. I also think any dollars you left to grandkids (up to $3.3M) would also be GST taxed at 40%. (Because I think the estate uses up the exemption amount first, then GST gets whatever is left, if anything, of the exemption amount.)

That understanding matches a conversation I had with an estate planning attorney here in my state, but I may have misunderstood him.

But that's just my understanding. I understand you think differently - do you have any sources for your understanding? I know that web pages often will list the estate tax exemption amount in one column and the GST tax exemption amount in a second column, but that fits both explanations (yours and mine). My understanding for why there are two columns like that is that in the past, the estate and GST exemption amounts were different.

I did find:

"The federal estate, gift and generation-skipping tax exemptions are unified and indexed for inflation in future years." (https://www.usbank.com/wealth-manag...ation-skipping-tax-affect-on-estate-plan.html)

But google doesn't provide any other hits that seem to apply, and I don't currently have the patience to wade through the IRS code itself.

 

[cathy63]

...My understanding is that you have a single $11.7M unified gift/estate/GST exclusion amount. So if your estate was $15M, then $11.7M of that would pass (federal estate) tax free to your heirs. The additional $3.3M would have estate tax owed on it at 40%. I also think any dollars you left to grandkids (up to $3.3M) would also be GST taxed at 40%. (Because I think the estate uses up the exemption amount first, then GST gets whatever is left, if anything, of the exemption amount.)...

Here's an article from Schwab that has a pretty good explanation. https://www.schwab.com/resource-center/insights/content/skipping-generation-skipping-transfer-tax

The $11.4 million exemption is actually two separate exemptions—one for gifts and estates, the other for the GSTT—however, when you use a portion of one exemption, an equal amount is automatically subtracted from the other.

Here’s an example of how these taxes and exemptions work. Imagine you wanted to make direct gifts of $7.7 million each to your adult daughter and grandson, for a total of $15.4 million. The most tax-efficient way to do this would be to apply the GSTT exemption to the grandson’s $7.7 million gift, thereby avoiding both the 40% gift and estate tax and the 40% GSTT.

That would reduce your remaining exemption to $3.7 million, which you could use to cover a portion of your daughter’s gift. The remainder of that gift—$4 million—would then be subject to just the 40% gift and estate tax.

 

[SecondCor521]

Here's an article from Schwab that has a pretty good explanation. https://www.schwab.com/resource-center/insights/content/skipping-generation-skipping-transfer-tax

Very interesting, thank you!

I'll need to look for some resources on how one chooses where to apply the exemption. It looks like perhaps the executor has some discretion? It also looks like it's obviously (?) better to apply it to GST monies before covering any non-GST monies.

ETA: Yes, the person or their executor gets to decide: https://www.law.cornell.edu/uscode/text/26/2631