Make more, save more. Whether helping clients build wealth or preserve it, financial advisors share a common goal: money in clients’ pockets, rather than Uncle Sam’s coffers.
While estate planning is a time-honored discipline that dovetails with this mission, strategies in the field evolve along with the tax climate and political landscape. Things have changed—so what’s the new frontier in estate planning of which financial advisors should be aware? The Generation-Skipping Transfer tax (GST).
GST is a second-layer tax typically imposed on asset transfers to grandchildren or any other generation beyond one’s children. Unlike the estate and gift tax exemption amounts, the GST exemption is non-portable, even between married couples, so it’s essential to plan for total deployment of the amount through a last will and testament, revocable living trust or with lifetime gifts.
The effective rate of GST—called the “applicable rate”—is determined by multiplying the “inclusion ratio,” which essentially is the percentage of the property to which GST exemption has not been allocated, by the maximum federal estate tax rate (currently 40 percent).
For example, an individual transfers
Back in 1976,
In order to preserve one’s GST exemption for larger lifetime transfers that may experience significant growth off the balance sheet, gift tax returns should be filed for annual exclusion gifts in trust. No tax will be due, but the opportunity to control allocation of the GST exemption will be afforded, maximizing the potential for tax-efficient wealth transfers to grandchildren and generations beyond.
At the end of 2012, the American Taxpayer Relief Act (ATRA) updated GST legislation, and the
Despite the complexities, you can help clients maximize their GST exemption, often in ways that are already familiar. Irrevocable life insurance trusts (ILIT) and annual exclusion gift trusts, both estate planning staples, are examples of common strategies that impact the availability of GST exemption due to the automatic allocation rules. Filing an annual gift tax return and not electing to deploy GST exemption on the transfer for small gifts preserves the exemption for larger lifetime transfers.
Our advice for accountants filing gift tax returns? Read a copy of the trust agreement and have a discussion with the client’s estate planning firm to understand the intended deployment of the GST exemption. Maintain your clients’ trust by avoiding problems in the first place and preventing the need to fix those problems at a greater cost down the road.
Using the same map for the new frontier will ensure that estate planners and investment professionals alike arrive at client satisfaction. When approached about transferring wealth to grandchildren, don’t hesitate to reach out and collaborate with the estate-planning attorney to best navigate the GST tax.
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|Source:||Penton Business Media|