As the gift and estate tax exemption amount increases, many have been inquiring about "how can I give my property to my grandchildren?". Indeed, even in the past, many people wanted to give their estates to their grandchildren. However, as the tax exemption amount rises, more inquiries are related to it.
Some may think the gift and estate tax exemption amount can be applied only to children, but fortunately, it is not. (that is, the tax exemption amount can be applied even to those who are not blood-related to the giver.)
No tax will be imposed if the estates given to grandchildren are less than the total tax exemption amount. However, if it exceeds the exemption amount, an additional estate tax will be imposed—"Generation Skipping Tax (GST)." The government implemented this additional tax system to address the situation where an increasing number of people give their estates to grandchildren to avoid an estate tax between parents and children.
To be specific, one is required to pay an estate tax whenever a property is given from parents (the first generation) to children (the second generation) and from children to grandchildren (the third generation). However, as more people attempted to save gifts and estate taxes by giving their estates directly to third generations, skipping the second generations, the government decided to impose additional taxes for this generation, skipping the transfer of estates.
Here, the Generation Skipping Tax (GST) means to skip one generation to give an estate or a gift. Also, even when the grantor (or the donor) and the heir (or the beneficiary) are not blood-related, the GST will be added if the heir (or a beneficiary) is 37.5 years or younger than the grantor (or the donor). However, the GST will be exempted if the heir (or the beneficiary) is a spouse or a former spouse who is 37.5 years or younger than the grantor (or the donor).
Therefore, when one with large properties passes away and the heir inherits them, which exceeds the estate tax exemption amount, the heir will be required to pay an estate tax. In this situation, this is the key: If the heir is 37.5 years or more younger and not blood-related—which is the generation-skipping transfer—the heir will be required to pay a standard tax for inheriting the properties and the GST additionally.
This generation-skipping transfer impacts not only tax issues but also the structure and dynamics of family relationships. Since it skips a generation, possible conflicts between the heir and the skipped generation, or a Skip Person, cannot be ignored. So, when my clients want to bequeath an inheritance to their grandchildren, I also encourage them to thoroughly consider its influence on the relationship between their children and grandchildren.
For example, Cul Su Kim would like to give property to his grandchildren because his children are well off, and he loves his grandchildren so much. In this case, I ask him whether he discusses this generation-skipping transfer of the properties with his children. If he says that he had a conversation with the children and they are okay with it, I will check the tax amount and how to avoid additional taxes in more detail with the client. However, if no discussion happened with his children but he insists on giving inheritance to grandchildren, I encourage him to discuss it with his children first. If children disagree with it, the generation-skipping transfer needs to be reconsidered.
For instance, if the inheritance is given to a nephew while skipping an uncle, or if a daughter receives more inheritance than her father, we can expect the family dynamics after receiving the inheritance. Some clients think that it does not matter whether they argue and fight after their death. However, when it is done poorly, the generation-skipping transfer can greatly divide the relationship between parents and children, so it must be decided thoroughly from many different angles.
One should also consider whether the inheritance will be helpful for the grandchildren's lives when they receive them. The word "Trust Fund Baby" is not a joke. Only in Hollywood movies and white families, we think, are grandchildren who do not work at all but live life only based on the trust fund after receiving their grandparents' inheritance. But they are also in Korean American families. So, even when making Children's Trust or Grandchildren's Trust, you should be prudent and considerate.