Tax PlanningAs property passes from one generation to the next, it is subject to federal estate tax. Before 1986, it was possible, however, to avoid the estate tax when property passed to intermediate generations by trusts that paid only income to intermediate generations and distributed principal to successive generations. This was because the intermediate generation then did not acquire sufficient rights in the property to cause inclusion in their estates.
Since 1986, a federal “generation-skipping” transfer (“GST”) tax is imposed on transfers of assets to individuals who are more than one generation younger than the transferor. This includes transfers of assets that are given outright or in trust, whether by lifetime gifts or transfers at death. The GST tax is in addition to the federal estate tax. Each individual has a GST exemption and, in 2008, this exemption is $2 million. The GST exemption and the estate tax exemption are currently the same amount. Under current law, there will be no GST tax in 2010, but in 2011 the GST tax will be restored and the exemption will be $1 million (indexed for inflation). If the GST exemption is allocated to a trust, the GST trust, including any appreciation, is transferred to your grandchildren free of both estate and GST taxes at the time of your children’s deaths.
The benefits of a Trust which maximizes the benefits of GST planning are significant:
- Ensures that future generations receive maximum financial benefit from your prosperity by creating trusts that pass wealth tax free multigenerationally.
- After the death of each Trustmaker spouse, the trust is divided into exempt and nonexempt subtrusts to insure that the full amount of each trustmaker’s GST exemption is utilized whereas in a trust that does not maximize GST planning, it is possible in certain years that part of the decedent’s GST exemption would be lost.
- If you leave your assets to your children, at their deaths, their inheritance will be taxed in their estates. If, instead, your estate plan places that inheritance in a trust which maximizes the benefits of GST planning for the benefit of your children, after the death of both Trustmaker spouses, the trust is again divided into exempt and nonexempt trusts for either your children or your children and grandchildren. Then when your children die, the exempt trust assets will not be subject to estate or GST tax, so your grandchildren will collect the entire amount. If your grandchildren should die, the exempt assets will again pass tax free to the next generation in what we refer to as a “Dynasty Trust.”
- Exempt trust assets are drafted with a distribution standard limited to the ascertainable standard, that amount necessary for health, education, maintenance and support. This type of trust allows the children to receive that amount necessary to “maintain” their standard of living and also entitles them to creditor protection.
The tax law does not allow a taxpayer to shelter an unlimited amount of assets. If an amount greater than the GST exemption is transferred in trust, or passes outright to a grandchild, the excess is subject to the GST tax at your child’s death, at a flat rate equal to the highest marginal estate tax rate. It also doesn’t matter how many grandchildren you have -- the GST exemption for each grantor is limited to the exemption amount. Each spouse has a GST exemption, so that a married couple may transfer each of their GST exemption amounts to their children free of tax. With the use of the GST exemption and the sheltering of the appreciation in trust, planning can substantially increase the assets available for future generations. In addition, irrevocable trusts owning life insurance can “leverage” the GST exemption such that substantially more than the exemption amounts can pass free of estate and GST taxes. |