Virtually everyone knows about the California estate tax (unless they’ve been living under a rock for the last ten or twelve years).  But if you’re planning to leave property directly to your grandchildren or even great grandchildren, there’s another tax you need to plan for now.

A tax that can be just as costly as the California estate tax

The Generation Skipping Transfer Tax.

The Generation Skipping Transfer Tax (GST) is a tax on property passed directly from a grandparent to a grandchild or great grandchild by way of a will or a trust.  The GST even applies to property passed on to individuals not related to you if they are more than 37.5 years younger.  While currently repealed, like the estate tax, the GST will be resurrected in 2011.

Congress designed the GST to close a loophole in the estate tax.  Parents were leaving their estates to their children and the children paid estate tax on the inheritance.  Then, those children would subsequently pass their estates on to the grandchildren, incurring estate taxes a second time.  Eventually someone figured out that by leaving the estates to the grandchildren directly, they could avoid paying one set of estate taxes.  Congress passed the GST to tax transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger to eliminate the ability to skip paying taxes on the inheritance of one generation.

How much will the GST cost your heirs?  The GST has basically mirrored the estate tax.  In 2009, the estate tax rate was 45% and the estate value exempt from the tax was $3.5 million.  The GST and the estate tax expired in 2010 but will reappear in 2011, unless Congress takes action to extend the expiration.  If they don’t act, the GST tax exemption amount in 2011 will be $1 million and the tax rate will be 55%.  Both are significant changes and could cost your heirs a substantial portion of their inheritance.

If you don’t have an estate plan or the estate plan you have was prepared based on the old exemptions and tax rates, now is the time to plan for major changes in 2011.  Call us to schedule your Family Wealth Planning Session today so we can identify what needs to be done to protect more of your assets for your children and grandchildren.  Our Family Wealth Planning Session is normally $750, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge.  Call today and mention this article.