Generation-Skipping Transfer Exemption Could Lose Superpowers

What You Need to Know

Today, in many states, the arrangements can shield trusts from estate and gift taxes in perpetuity.
The proposal would limit the duration of a GST tax exemption.
Another budget proposal provision would update the rules for estate executors.

The Biden administration wants to keep wealthy families from using the generation-skipping transfer tax exemption to shield assets from estate and gift taxes forever.

The administration has proposed a GST tax exemption duration limit tied to the lifespan of the giver’s grandchildren.

The administration also has proposed estate administration rule changes that may be less dramatic but affect more people. One would replace the current, narrow definition of estate executor with a broader definition.

The U.S. Treasury Department describes the proposals in the general explanations report, or “Greenbook,” for Biden’s budget proposal for federal fiscal year 2023.

The department put the estate administration and GST proposals in a section with the heading “Modify Estate and Gift Taxation.

The GST Exemption

Federal law imposes a generation-skipping transfer tax on givers of gifts and bequests to recipients who are two or more generations younger than the givers. The givers gets a lifetime GST tax exemption.

The 2022 exemption is $12.06 million.

The giver can allocate the exemption amount to a grandchild or other “skip person,” according to the Treasury department.

Because of the way federal trust rules, state trust rules and the GST tax exemption rules work together, residents of many states can now use the GST tax exemption and trusts to shield assets from estate and gift taxes permanently, officials report.

Under the proposal described in the Greenbook, the GST exemption would apply only to “beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust. ”

Estate Tax Administration

The current federal definition of “executor” applies only for estate tax purposes, and the executor has no ability to help with other matters related to an individual’s death, Treasury officials report.

What It Means

Major tax rule changes can circulate for years before becoming law, and many proposals simply fade away.

If the GST tax exemption becomes law, that may disrupt new estate planning arrangements, and it could, possibly, affect some existing arrangements.

The families affected need updates about the possible changes now.

Whether families could use life insurance or other arrangements to reduce the impact of the changes will not become clear until the official legislative language appears.

If the changes become law, some families might buy extra life insurance to address the cost of any extra change-related tax bills.