Women And Money: Generation-Skipping Transfer Tax

In addition to the federal gift tax and the federal estate tax there is also a federal generation skipping tax. The term “generation-skipping” is slightly misleading. It does not mean that you have to skip the generation below (being your children) as beneficiaries of your estate plan.

It means that you skip the federal estate tax that will be due at your childrens’ generation level. The concept is quite confusing. Enacted to make sure that all family property above a certain amount would be subject to a tax at least once in each genera­tion, this tax minimizes the amount of assets that can be passed on tax free to generations below your children. Currently this exemption is $5,000,000.

If an asset is taxed by estate taxes at your death, and then again at the death of your children, then by the time the assets reach the grandchildren, a significant amount of the value of the original asset will be lost to estate taxes. That’s why some wealthy families establish trusts (either during their lives or to be effective at the time of their deaths) to skip the tax their children’s estates will have to pay.

This type of trust is commonly known as a “dynasty trust,” and it stipulates that when the donors die, the generation-skipping tax exemption amount will not be distributed outright to their children, but will stay in trust for the duration of their children’s lifetime and bypass tax in the children’s estate. If the funds are distributed to the child during the child’s lifetime they are assets of the child and will be then included in the child’s taxable estate – it is only if they are retained in the trust for the child’s lifetime that they skip estate taxation at the child’s death.

That is where the tax skip happens. If the trust had instead been distributed to the child during his lifetime, then the assets in it would be part of that child’s taxable estate. By keeping it in trust (which can be for the child’s benefit during his or her lifetime) and not giving it to the child outright, that child is not considered to have owned it for federal tax purposes. It is therefore accessible to him during his lifetime, but will bypass estate tax at his death.

These trusts typically run 90 years. If the trust is established in certain states, it never has to end and can be perpetual. Any appreciation in the value in the assets between the time they are placed in the trust and when the trust ends bypasses estate tax in the chil­dren’s estate.

Still confused?  Don’t be, post a comment or question below and I’ll help you understand this important tax cutting option for your estate. Have other questions about taxation or something specific to your estate, please post your question below and I’ll provide whatever you need to protect yourself and your family.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning.  She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about.  Annino recently announced the release of an updated version of her successful book, Women and Money: A Practical Guide to Estate Planning to include recent changes in the laws that govern how we protect our assets during and beyond our lifetime.  Annino’s book is an exhortation, resource and trusted companion for women in all facets of life.  To purchase the book visit:  http://amzn.to/hOHuEV or for more about Annino, visit: www.patriciaannino.com



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