You have worked your whole life to preserve your wealth; after you pass on, the last thing you want is for Uncle Sam to wind up with the lion’s share of your hard-earned assets. An inheritance can mean a college education, cash to start a business, or a myriad of other advantages that will give your descendants a leg up in life – but only if the money gets past the taxman.
Your estate generally includes everything you own at the time of your death, including real estate, bank accounts, stock holdings and personal property. If the value of your estate exceeds a certain exempt amount, the IRS will take a cut. There are many strategies that an experienced estate planning attorney can use to help you reduce the taxable value of your estate and pass on as much as possible to your heirs. Specifically, if you are looking to keep a nest egg intact for your grandchildren, a generation-skipping trust can be a highly advantageous instrument.
Currently, the top estate tax rate is 40 percent. This means that if you pass your entire estate down to your children, the IRS will take 40 percent of the value that exceeds your estate tax exemption. Assuming Congress does not modify the standard estate tax rate, this also means that when your children pass on an estate to their children – your grandchildren – the value of their taxable estates will be slashed by 40 percent once the government takes its cut. For families with significant wealth, this taxation through each generation can be crippling.
A generation-skipping trust is just what it sounds like; it is a financial vehicle that “skips” your children’s generation and transfers assets directly to your grandchildren. The primary purpose of a generation-skipping trust is to avoid the double round of taxation that comes with the generational transfer of wealth first to your children, and then to your grandchildren. Any nonexempt portion of your transfer to a generation-skipping trust will only be taxed once before being available to your grandchildren.
Generation-skipping trusts also protect familial wealth and assets intended for long-term appreciation. Should your children suffer major financial setbacks – divorce, oppressive medical bills, a failed business, etc. – assets in the trust are not reachable by your children’s creditors.
Setting up a generation-skipping trust does not necessarily mean your children have to be left completely out of the picture, though. The trust can be structured so income generated by the trust’s assets – for example, dividends or interest – is accessible to your children. Of course, a generation-skipping trust can also be customized in other ways to ensure that the assets and any income they generate are distributed according to your wishes.
A generation-skipping trust can be a powerful tool to lower the tax burden on the assets you would like to pass on. A knowledgeable estate planning attorney can advise you on the full range of legal options that can help you protect your legacy. Contact an attorney to learn more.