There are a lot of aspects to estate planning that can help you ensure that you minimize the tax burden on your heirs. In Maryland, there are plenty of state and federal tax structures to understand, and each one can have a major impact on taxes. The generation-skipping transfer tax is one that trips up a lot of people who are not expecting it.
The GSTT is a special tax that applies to anyone who passes down assets across two generations, or from a grandparent to a grandchild. It also applies if the age gap between the older and younger person is 37.5 years or more. It’s a tax of 40 percent that applies in addition to the estate tax, which can also be 40 percent. Normally, when a parent leaves their assets to their children directly, and then those children pass the assets down to the third generation later, the two stages of inheritance are taxed individually. The GSTT is designed to make sure the full taxes are paid if the deceased skips the middle generation.
The combination of the estate tax and the GSTT can be significant. That’s why it is important to develop estate planning strategies that can help to mitigate this tax burden. Careful use of annual gifts, direct contributions to colleges, use of trusts, and other options can help.
None of these choices is perfect, and they all have their own complexities. But failing to plan for the GSTT can lead to a nasty surprise when the tax bill for those generation-skipping transfers comes due and it goes along with the estate tax as well.