In most respects, grandchildren’s trusts are just like the type of trust a grantor might create for his or her children. One unique quality of grandchildren’s trusts is that transfers made into these trusts are subject to the generation-skipping transfer (GST) tax. Grandchildren’s trusts benefit not only the grandchildren, but also the grantor. Grandchildren’s trusts can help lower the grantor’s estate tax.
There are certain aspects of the transfer tax that you should be aware of when dealing with grandchildren’s trusts. Here are some facts to keep in mind:
The generation-skipping transfer tax has annual exclusion amounts, the same as the gift tax annual exclusions.
Despite these annual exclusion amounts, the amount that you may transfer GST tax free is limited to a cumulative $1 million per lifetime.
Any generation-skipping transfer tax you pay is in addition to any gift taxes or estate taxes also owed on the transfer.
Grantors often create grandchildren’s trusts to provide funds for a specific purpose, such as education or the purchase of a first home. But these trusts also allow the trustee a great deal of freedom when choosing to make a distribution for another purpose. As with children’s trusts, they are sometimes created with an end plan in place so that the principal is distributed to the beneficiary at a specific age.
You can lower your estate tax with annual gifts to grandchildren’s trusts. You can fund grandchildren’s trusts during your lifetime with annual gifts equal to the current annual exclusion amount. The annual exclusion amount is the amount that can be transferred without tax. This amount is reviewed annually, so check the current amount.
Funding grandchildren’s trusts is a great way for grantors to remove assets from their estates, especially if they suspect their estates may be taxable at their deaths.
