Generation-skipping transfer taxes (GSTT) are a critical consideration for Miami’s multi-generational families seeking to preserve wealth and minimize tax burdens. Understanding how generation-skipping transfer taxes work—and the strategies available to reduce their impact—can make a significant difference in your family’s long-term financial legacy.
What Are Generation-Skipping Transfer Taxes?
Generation-skipping transfer taxes are federal taxes imposed on the transfer of wealth to a beneficiary who is at least 37.5 years younger than the donor, typically a grandchild or great-grandchild, or an unrelated person of similar age difference. The GSTT was created to prevent families from avoiding estate taxes by transferring assets directly to younger generations, bypassing the children and the estate tax that would otherwise apply at each generational level.
Currently, the GSTT is a flat 40% tax applied to transfers exceeding the exemption amount, and it is assessed in addition to any applicable estate or gift taxes. For 2025, the GSTT exemption is $13.99 million per individual and $27.98 million for married couples, meaning only transfers above these amounts are subject to the tax.
Why Miami’s Multi-generational Families Need GSTT Strategies
Miami’s diverse and affluent families often aim to pass wealth across multiple generations. However, without careful planning, GSTT can significantly erode the value of these transfers. Since the GSTT applies both to direct gifts and bequests as well as to distributions from certain trusts, Miami families must be proactive to avoid unnecessary tax liabilities.
Key GSTT Concepts for Miami Families
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Skip Person: A beneficiary at least two generations below the transferor, such as a grandchild, or an unrelated person more than 37.5 years younger.
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Direct Skip: A transfer made directly to a skip person, either by gift or inheritance.
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Taxable Distribution: A distribution from a trust to a skip person.
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Taxable Termination: When an interest in a trust terminates and only skip persons remain as beneficiaries.
Strategies to Minimize Generation-Skipping Transfer Taxes
1. Establish a Generation-Skipping Trust (GST Trust)
A generation-skipping trust is a powerful tool for Miami families. By allocating your GSTT exemption to a trust, you can pass assets to grandchildren or future generations while providing income to your children. This allows you to preserve wealth and avoid estate taxes at each generational transfer, especially when using dynasty trusts that can last for multiple generations.
2. Leverage the GSTT Exemption Before It Sunsets
The current high GSTT exemption is set to sunset at the end of 2025, potentially dropping to much lower levels unless Congress acts. Miami families should consider making large gifts or funding trusts now to take advantage of the higher exemption, as any assets transferred under the current exemption will remain protected even if the exemption decreases in the future.
3. Maximize the Annual Gift Exclusion
Each year, you can give up to $19,000 per recipient in 2025 ($38,000 for married couples) to as many skip persons as you wish without using your lifetime GSTT exemption or incurring GSTT. Making regular annual gifts to grandchildren or other skip persons is an effective strategy to transfer wealth tax-free over time.
4. Make Direct Payments for Education and Medical Expenses
Payments made directly to educational institutions or medical providers for a skip person are exempt from both gift and GST taxes. This strategy allows Miami families to support younger generations’ education and health needs without reducing their GSTT exemption.
5. Utilize Limited Liability Companies (LLCs) and Family Partnerships
Transferring assets through LLCs or family limited partnerships can provide both asset protection and tax efficiency. These structures allow for gradual, tax-advantaged transfers to younger generations, often at discounted values for gift and GSTT purposes.
6. Properly Allocate GSTT Exemption to Trusts
When funding a trust for skip persons, it is crucial to affirmatively allocate your GSTT exemption on a timely filed gift tax return (Form 709). Proper allocation ensures that all future growth of the trust assets is sheltered from GSTT, maximizing the long-term benefit for your family.
7. Review Automatic Allocation Rules
The IRS has automatic allocation rules that may apply your GSTT exemption to certain transfers, but these rules are complex and can sometimes result in wasted exemptions or missed opportunities. Work with an estate planning attorney to ensure your exemption is used optimally for your family’s needs.
Special Considerations for Miami Families
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State Taxes: While Florida does not impose a state estate or inheritance tax, families with property or beneficiaries in other states should consider potential state-level GSTT implications.
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Trust Design: Dynasty trusts and GST trusts must be carefully drafted to comply with both federal tax law and Florida’s rules against perpetuities, ensuring the trust can last as long as intended.
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Regular Review: As tax laws and family circumstances change, regularly review your estate plan to ensure your GSTT strategies remain effective.
Conclusion
Generation-skipping transfer taxes can have a significant impact on Miami’s multigenerational families, but with the right strategies, you can minimize taxes and preserve family wealth for generations to come. By leveraging GST trusts, maximizing exemptions, making direct payments for education and medical expenses, and working with experienced advisors, your family can navigate GSTT with confidence and security. Now is the time to act—especially before potential changes to exemption amounts in 2026—so your legacy endures for future generations.
