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Virginia Generation-Skipping Trust

Many families use trust documents as a means to transfer accumulated wealth to subsequent generations. When you transfer wealth either during your lifetime or at your death, you may be subject to taxation as a result of those transfers. Applicable transfer taxes may include estate, gift or generation-skipping transfer (GST) taxes.

A Virginia generation-skipping trust may be a beneficial document to incorporate into your estate plan to help minimize your transfer taxes. Speak with an experienced attorney to learn more. A Virginia trusts and estates lawyer may be able to provide valuable insight.

How does a Generation-Skipping Trust Work?

A Virginia generation-skipping trust is a specialized type of trust that is drafted to skip a generation by ultimately distributing your assets to your grandchildren or more remote descendants, such as your great-grandchildren.

A GST trust may also distribute assets to an unrelated person who is at least 37.5 years younger than you, the grantor. A person who falls into these categories is referred to as a skip person in the Internal Revenue Code. A properly drafted GST trust will not leave assets to the grantor’s children, the grantor’s spouse or ex-spouse.

A generation-skipping trust should be drafted using language that will qualify for the GST tax exemption. The trust must also benefit qualified skip persons. Without the proper language, beneficiaries, and tax elections, the trust distributions could trigger unwanted tax consequences.

The trust may benefit the grantor’s children during their lifetimes, however, the children will never take full possession of the trust assets. Upon the children’s deaths, the assets must be distributed to “skip persons.”

What is GST tax?

GST tax is a federal tax that is imposed on transfers that essentially “skip” a generation. These taxable transfers may be made either directly to such persons or to a trust for their benefit. Although Virginia does not impose a state estate, gift or GST tax, Virginia residents may still incur tax liability at the federal level.

In 2017, individuals are entitled to GST tax exemption of $5.49 million. As a result, you may transfer up to $5.49 million without incurring GST tax liability. Transfer totals exceeding this exemption amount will be subject to a tax rate of approximately 40 percent.

The GST tax exclusion is separate and in addition to the federal estate and gift tax exclusion, which is also currently $5.49 million per person. The GST tax was originally implemented to tax transfers that had escaped estate and gift taxation by using strategically drafted trusts.

Tax Exclusions

Qualified annual exclusion gifts and qualified payments for medical or educational expenses made directly to the providing institutions will not count toward your GST tax exemption. As of 2017, every person is entitled to make annual gifts of up to $14,000 per person free of transfer tax.

When Should Someone Use a Virginia Generation-Skipping Trust?

If you have substantial assets that are going to implicate transfer taxes, a Virginia generation-skipping trust is a great way to take advantage of your GST tax exemption amount. You can do this by funding your GST trust with assets equal to the $5.49 GST tax exemption.

A Virginia generation-skipping trust is an advanced estate planning document that should be prepared with the assistance of a knowledgeable estate planning attorney. Tax laws can change often, so even if you have an existing estate plan, you should have it reviewed by an attorney periodically to make sure it works well under current tax laws.

If you would like to know more about GST trusts or other specialized trusts we can prepare to meet your needs, please reach out to a Virginia estate planning attorney.