Generation-skipping transfer tax

Understanding the Concept of Generation-Skipping Transfer Tax

If you are into the trading business, you might have heard the term 'Generation-skipping transfer tax'. It's a tax concept particularly relevant in estate planning. But don't worry if it seems a bit complicated at first glance. Let's break it down!

What is Generation-Skipping Transfer Tax?

Simply put, the Generation-skipping transfer tax (GSTT) is a US federal tax. It applies to an outright monetary transfer or trust transition from one directly to their grandchild or great-grandchild. It's a way to stop families from avoiding estate taxes with each passing generation.

How Does Generation-Skipping Transfer Tax Work in Trading?

You still might wonder, what does GSTT have to do with trading? Well, as a trader, you deal with assets. Perhaps, you have thought about gifting some of your trading capital or assets to your descendants.

For instance, you might want to pass on your shares to your grandson instead of your child. In this case, the Generation-skipping transfer tax might apply. This tax prevents you from avoiding the estate tax that would typically be due if assets were passed from parent to child first, then to the grandchild.

Understanding the Impact of Generation-Skipping Transfer Tax

Does the idea of paying a tax for skipping a generation seem unfair? There's good news. There's a hefty exclusion limit in place for the Generation-skipping transfer tax. In 2021, the exclusion limit is $11.7 million for single individuals and $23.4 million for married couples.

That means you can give this much to your grandkids (or anyone else who’s at least 37½ years younger than you) over the course of your life or upon your death before the GSTT comes into play.

Conclusion

Understanding the concept of Generation-skipping transfer tax helps traders make more informed decisions about estate planning. So before passing on your trading assets to the next generation, be aware of the GSTT and its implications.