Over the course of your life, you worked hard and put in long hours for your assets. Understandably, the idea of paying a large portion of these assets in federal estate tax is probably the last thing you want to do. There are many ways that you can preserve your wealth for your loved ones, and one of these methods is called a generation-skipping trust.
What is a Generation Skipping Trust?
A generation-skipping trust allows you to pass on a portion of your wealth to your grandchildren, as opposed to leaving it all to your children, and therefore avoid estate tax. A Walnut Creek attorney can help you create a generation-skipping trust as part of your overall estate plan, maximizing the wealth that your loved ones will receive.
Is a Generation-Skipping Trust Necessary?
The current estate tax exemption is $11.4 million, while for a couple it is doubled to $22.8 million. If you or your spouse are leaving behind less money than this, you do not need to worry about a generation-skipping trust to preserve your wealth from estate taxes, as you will not have to pay any. Only 0.1 percent of the population (one out of every 4,000 estates) has enough value to be taxed according to the Tax Policy Center.
Generation-Skipping Transfer Tax
Before 1976, wealthy individuals often used a loophole in the tax code to pass their wealth onto their grandchildren, avoiding the estate tax that they would have had to pay otherwise if they passed their assets directly to their children. In 1976, the Generation-Skipping Transfer Tax (GSTT) was created, closing this loophole, according to the Internal Revenue Service (IRS). This change in the tax code meant that wealthy individuals could not simply avoid all estate taxes by giving their wealth away to their grandchildren.
How A Generation-Skipping Trust Works
The beneficiary or “skip person” that the trust is created for must be at least 37.5 years younger than you, and not a spouse. The person can be a grandchild, nephew or niece, or a non-blood relative.
Benefits to a Generation-Skipping Trust
While the Generation-Skipping Transfer Tax closed the loophole, there may still be benefits to creating a generation-skipping trust. These include the following:
- Your wealth only gets taxed once instead of twice. If you were to pass on your wealth to your children, it would be taxed. Then, if your children passed on that wealth to their children, it would be taxed again a second time in two generations; and
- Future asset earnings on the trust will not be taxed. If you fund the GST trust with the maximum tax-exempt amount ($11.4 for an individual), all appreciation earned on the trust over the years will bypass taxation and go directly to the beneficiaries.
Our Walnut Creek Estate Planning Attorneys Are Here to Help You
Whether a generation-skipping trust or other wealth preservation method will benefit you, our Walnut Grove estate planning attorneys can help with that. To learn more about your options, call the Feldman Law Group today at (925) 208-4543 to schedule a free consultation.