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What Is a GST Exemption?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 24 July 2014
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A generation-skipping transfer (GST) tax exemption is a tax benefit that allows people to avoid paying GST on certain types of transfers under a certain amount. It applies in the United States, where tax laws surrounding inheritance can be extremely complex. Executors handling the disposition of an estate should be sure to consult a tax accountant to get information about how to manage it. Individuals planning their wills may want to discuss tax implications to make sure their estates provide the most possible benefits to their heirs.

Bequests classically skip generations when a will does something like establishing a trust for children and grandchildren. Sometimes the children have already died, and their share of the trust will go to the grandchildren, skipping a generation. In this situation, tax applies to the recipient of these bequests, unless they qualify for a GST exemption. Because their parents did not pay taxes under the structure of the trust, the government wants a chance to collect its taxes now.

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The law about GST exemption standards changes from year to year. It usually depends on when a person dies, rather than when the GST actually takes place. The GST exemption provides for tax-free inheritance of generation-skipping transfers under a certain amount. This allows grandchildren to inherit some funds and other assets without tax penalties, rather than incurring a heavy penalty with a bequest. The goal of the exemption is to make sure that family wealth will still be available to inheritors, rather than being consumed by taxes.

The amount of the exemption fluctuates between tax years, depending on economic factors and government policy. More conservative governments tend to increase the size of the GST exemption along with making other tax cuts, while liberal governments may decrease tax benefits. In some years, all GSTs may be made exempt. Because the year of death is an important factor, it is critical to have accurate information and to make sure an account is operating with the right data.

In estate planning, people can discuss ways to take advantage of the GST exemption with a tax attorney or accountant. There are techniques that can be used to structure a will to reduce tax liabilities, usually through the creation of a trust. Trusts can also create a mechanism for preserving assets for future generations, as opposed to disbursing an entire estate at the time of death.

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