McGuireWoods’ Steve Murphy, Farhan Zarou Discuss Perils of GST Tax in Trusts & Estates

June 27, 2023

A section of the federal tax code that doesn’t get much attention is a “ticking time-bomb” for a growing number of trusts established since its passage, McGuireWoods Charlottesville partner Stephen W. Murphy and Jacksonville associate Farhan N. Zarou wrote in the June 2023 issue of Trusts & Estates magazine. Murphy chairs the firm’s private wealth services group.

Murphy and Zarou noted that the generation-skipping transfer (GST) tax, which Congress passed in 1985 to keep donors from avoiding estate taxes by “skipping” their children and bequeathing estates directly to grandchildren or other descendants, has reached a symbolic milestone. The law, which also applies to non-relatives who are at least 37½ years younger than the donor, has now been in effect for more than 37½ years.

The anniversary is a chance to take stock of the law’s impact, which will likely be felt more acutely in coming years, the authors wrote. Any children who were “skipped” by a trust created soon after the law’s passage may now be reaching old age. Once the final member of a skipped generation passes away, the GST tax bill finally comes due for those beneficiaries who fall within the law’s scope.

“Therefore, the aging of those generations is precisely the time that we should be concerned about GST tax—and when we should be taking steps to temper, minimize or avoid it,” the attorneys wrote. “It’s critical for the trustee of an irrevocable trust to take this time to identify the GST tax characteristics of the trust, to properly report this information to the beneficiaries and to identify and take appropriate steps to avoid, minimize or temper the GST tax implications.”

The attorneys went on to outline some strategies for mitigating the impact of the GST tax, and some potential traps that parties must be mindful of. But with the right planning, the attorneys wrote, practitioners and donors can ensure that such trusts are administered in an efficient manner for generations to come.