Estate planning is the process of deciding how, and in what manner, your assets will pass to your loved ones.  For many, a large component of the design of an estate plan focuses on minimizing taxation that occurs upon the transfer of wealth.  While estate and gift taxation are the primary focus of many individuals, another transfer tax, the generation-skipping transfer tax (of GSTT), is often overlooked.  When transferring assets, it is important to consider when and how the GSTT may apply.

This federal tax is triggered when an individual transfers assets to a skip-person (i.e., someone who is more than one generation below than the transferor).  Such a transfer can be direct (e.g., when a grandparent makes a gift directly to a grandchild) or it can happen indirectly (e.g., when a transfer is made to a skip-person through a trust).  The ability to transfer wealth to multiple generations without taxation, which is particularly relevant is states where dynasty planning is available (like New Jersey), is an extremely powerful estate planning option.

Generation-Skipping Tax Defined

The Internal Revenue Code imposes gift and estate taxes on transfers of wealth above certain limits.  For 2021, an individual can exclude gifts of up to $15,000 from the gift tax, with that limit doubling for married couples who agree to split the gift.  The lifetime exemption from federal estate tax in 2021 is $11,700,000 per person.  Thus, for 2021, an individual can pass wealth having a value of as much as $11,700,000 free of federal estate tax.  Note that the lifetime exemption can also be applied against lifetime gifts made in excess of the annual exclusion amount.

The gift and estate tax rate is 40% on the value of assets over the lifetime exemption amount.  In addition to the gift and estate taxes, the IRS imposes the generation-skipping transfer tax on the passage of any wealth that skips one or more generations.  Assets subject to the generation-skipping transfer tax are also taxed at a 40% rate, in addition to the federal estate tax.  However, like the estate tax, there is a lifetime exemption from the GSTT, which in 2021 is $11,700,000.

How to Apply the GSTT

Generation-skipping transfer tax covers the transfer of assets (directly or indirectly) to skip-persons.  Typically, the GSTT is applied on the transfer of wealth from a grandparent to a grandchild when the grandchild’s parent (who is also the child of the transferor grandparents) is still alive.  If a transfer is made to a grandchild whose parent has predeceased the transferer, then the GSTT would not apply.

As noted above, the GSTT is a separate tax from the federal estate tax and it applies alongside it.  Similar to estate tax, this tax kicks in when an estate’s value exceeds the lifetime exemption limit.

This is how the IRS covers its bases in collecting taxes on wealth as it moves through multiple generations.  If an individual were to pass his/her wealth to a child, who then passes it to their child, then no GSTT would apply; however, the federal estate tax would be triggered upon the passing of each generation.  If wealth is to be passed directly to a grandchild, that removes a link from the taxation chain. The GSTT essentially allows the IRS to replace that link, but, as noted above, there is a lifetime exemption that can be applied against generation-skipping transfers which renders such assets to which the exemption is applied exempt from taxation regardless of how many generations to which it subsequently passes.

The Power of Avoiding The Generation-Skipping Transfer Tax

Transferring assets to a trust that has the ability to remain in effect for multiple generations (such trusts are commonly referred to as “dynasty trusts”) and allocating lifetime exemptions against estate tax and GSTT is a tremendously powerful estate planning tool.  The compounding effect avoiding transfer taxes over multiple generations can lead to some amazing results.  The following illustrates the differences in result for a $1,000,000 contribution into a dynasty trust that will last for 120 years.  The savings potential is often greater than illustrated since the example ignores the fact that property received outright will probably be reduced further due to (1) divorce settlements, (2) creditor problems, and (3) the fact that assets are less likely to be dissipated in a trust than if held outright even if the invasion rights in a trust are extremely broad and generous.

Annual After-Tax Growth	Value After 120 years
3.00%	34,710,987
4.00%	110,662,561
5.00%	348,911,561
6.00%	1,088,187,748
7.00%	3,357,788,383
8.00%	10,252,992,943
9.00%	30,987,015,749
10.00%	92,709,068,818

 

Conclusion

For those seeking to maximize wealth preservation, avoiding the generation-skipping transfer tax is an essential component to an estate plan.  In addition to the divorce and creditor protection that dynasty trusts offer, the ability to transfer assets to multiple generations of beneficiaries and avoid transfer taxation, and in particular the GSTT, is a feature that anyone looking to protect assets and maximize wealth should utilize.

 

Overview

The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (passed on December 27, 2020) is intended to help offset the huge financial crisis caused by the Coronavirus (COVID-19) pandemic.  As part of this act, a second round of COVID-19 stimulus checks were approved for most Americans, including those who are elderly and on fixed income. On December 29, 2020, the issuance of these payments began by the Internal Revenue Service (IRS) and the U.S. Treasury Department. Even as the second stimulus payments go out, there is a push for a third stimulus check.

Many Medicaid beneficiaries who live at home, assisted living, adult foster care, or nursing homes are concerned the money will put them over the Medicaid income or asset limit, and therefore, disqualify them from Medicaid benefits. Medicaid applicants express the same concern that the additional money will cause them to have income or assets over Medicaid’s limits, and as a result, prevent them from becoming eligible for Medicaid.

Stimulus checks do not count as income, and therefore do not impact Medicaid beneficiaries or applicants. However, should the stimulus money not be spent within 12 months, it will be counted as an asset, and therefore could impact eligibility in the year ahead.

Stimulus Check Impact for Medicaid Beneficiaries

Nursing Home Residents

The receipt of stimulus checks by Medicaid beneficiaries who reside in nursing homes do not impact these individuals’ Medicaid benefits. In other words, stimulus checks do not disqualify them from Medicaid benefits. This is because Medicaid does not count the money as income, which means it cannot push one over Medicaid’s income limit, and hence, result in the loss of Medicaid benefits.  Furthermore, stimulus checks do not count as assets, provided that the money is spent within 12-months of receiving it. Therefore, a nursing home Medicaid recipient can retain possession of the stimulus money and it will not impact that beneficiary’s Medicaid eligibility. However, it is essential that the stimulus money be completely spent within one year of receipt. If it is not spent down, the remaining amount will count towards Medicaid’s asset limit and could potentially push the beneficiary over the resource limit, resulting in Medicaid disqualification.

Neither Medicaid, nor a nursing home in which a Medicaid beneficiary resides, can take stimulus check money to help cover the cost of their care.

Spouses of Nursing Home Residents

Non-applicant spouses of Medicaid-funded nursing home residents (called Community Spouses) can receive stimulus checks without impacting their spouses’ Medicaid eligibility in any manner. First, and foremost, the money from stimulus checks is not considered income by Medicaid, and even if it were, the income of a non-applicant spouse is not considered in the continuing Medicaid eligibility of the institutionalized spouse.

For Medicaid beneficiaries, the entire check needs to be spent within 12-months of receiving it or the remaining funds will count as assets towards Medicaid’s eligibility. However, the same rule does not hold true for community spouses.  There is no time limit in which a community spouse must spend his/her stimulus checks.  The funds from a non-applicant spouse’s stimulus check will never count as resource towards the institutionalized spouse’s eligibility.

Medicaid Waiver Beneficiaries

Home and Community Based Services (HCBS) Medicaid Waiver recipients can receive stimulus checks and it will not impact their Medicaid eligibility if spent within 12-months of receipt.  This is because the money from the checks is never considered as income, but it will be counted towards Medicaid’s resource limit if not spent within the specified 12-month period.

Aged, Blind and Disabled Beneficiaries

Persons who are on Aged, Blind and Disabled (ABD) Medicaid are no exception from other Medicaid recipients and will be issued a second stimulus check.  The receipt of this money will in no way impact an ABD beneficiary’s Medicaid benefits, meaning the receipt of this check will not cause one to lose his/her Medicaid benefits.  The money is also not considered as income for Medicaid purposes, nor will it be treated as a resource for the first 12-months.  However, if the money is not spent down in its entirety during that timeframe, any remaining funds will be counted as a resource by Medicaid and could cause one to lose his/her Medicaid eligibility.

Stimulus Check Impact for Medicaid Applicants

When it comes to applying for Medicaid, stimulus checks are not considered towards Medicaid’s income or asset limit (if spent within 12 months of receiving it) in any of the 50 states and Washington DC. This means that the receipt of these cash payments will not cause an applicant to be over the income and/or resource limit(s), and hence, be denied Medicaid benefits.  This is true regardless of what Medicaid program (ABD Medicaid, nursing home Medicaid, HCBS Medicaid Waiver) an applicant is applying for and regardless of marital status.

Medicaid has a 60-month look back period (Medi-Cal in California is 30-months) in which Medicaid considers all past asset transfers immediately preceding one’s Medicaid application. During this timeframe, the Medicaid agency scrutinizes all past asset transfers to ensure no assets were given away or sold under fair market value. If one violates this rule, it is assumed it was done to meet Medicaid’s asset limit and a penalty period of Medicaid ineligibility is established. However, it is thought that the stimulus money is exempt from this rule, given the money is gifted within 12-months of receiving it. Therefore, a Medicaid applicant, or someone considering applying for Medicaid, could give away the stimulus check money to family members, educational funds, to charity, etc. during the 12-month period. However, after 12-months, the funds would count as assets for Medicaid eligibility purposes and giving the money away would violate Medicaid’s look back rule.