Use a Generation-Skipping Trust to Preserve Your Wealth For Your Grandkids
 By Shane Flait © 2008 

If you and your children have sizeable estates – that will easily exceed estate tax exclusion levels, you may want to transfer some wealth directly to your grandkids. You do this by using a generation-skipping trust (GST) – also known as a dynasty trust. Let’s see take a look at some of the issues.

 

Under current estate tax rates and a high estate value, to leave 1 dollar for your grandchild you need about 3 dollars in your estate. That’s the effect of estate taxes on wealth left to your child which at his death goes to his child.

 

By establishing an irrevocable GST during your lifetime, you can avoid all or most gift taxes and eventual estate taxes on what you fund the trust with along with its appreciation.

 

What are the taxes on transfers?

Estate Tax:

The government imposes taxes[1] on the value of your estate when you die. It’s called the estate tax and its rate rises quickly to 45% for estate values in excess of the estate tax-exempt level ($2 million in 2008 – see table).

 

Gift Tax:

It also imposes a final gift tax also on the value of all gifts you made during your life time beyond the annual gift tax exclusion ($12,000 per donee in 2008) and beyond a final gift tax exclusion level of $1 million in 2008 (see table).

 

Generation Skipping Transfer Tax:

And yet again, it imposes a transfer tax on generation skipping transfers at the highest federal estate tax rate. This tax applies to transfers beyond a $2 million (2008) exemption level (see table).

 

All these taxes are applied at your death – and use the relevant exclusion level for the year of your death – see table.

 

 

Year	Highest Estate Tax Rate	Estate Tax Exclusion Level	Gift Tax Exclusion Level	Gen-Skip Exclusion Level
2008	45%	$2 million	$1 million	$2 million
2009	45%	$3.5 million	$1 million	$2 million
2010	No  Estate Tax	No Estate Tax	$1 million	?
2011	Return to pre-2001 levels	Return to pre-2001 levels	Return to pre-2001 levels

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding the trust will result in a gift tax. However you can avoid or minimize this tax by taking advantage of the $2 million transfer exemption level as well as the annual gift exclusion level if the trust is properly drafted.

 

Fund the trust as early as possible. Since it’s irrevocable, your funding assets are taken out of your estate – so reducing eventual estate tax on them. Additionally they’ll appreciate while your living and go to your beneficiaries free of estate tax. But because trusts pay fairly high income tax rates, fund the trust with assets that don’t generate income but appreciate substantially over time.

 

You can determine just how narrow (or broad) the trustee’s discretion will be when you draft the dynasty trust.  The trust can even allow responsible beneficiaries to have complete control and access to their trust assets or limit access accordingly.  Because the rule against perpetuities has been repealed in many states, a dynasty trust of this type can truly create an enormous trust exempt from death taxes for the indefinite future.

 

Learn more about efficiently transferring your wealth to give love ones as much as possible.

 

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com