A generation-skipping trust is used to help save on federal estate taxes. It is an estate planning tool. It is generally used when your children are in reasonably good financial shape. A generation-skipping trust can also be used to help provide income for your children such as for the cost of college, graduate school, weddings, or health needs. The catch is that your children don’t have control over the principal. The principal is only available for distribution to your grandchildren. Any estate taxes are paid when your grandchildren receive their share. There is no estate or transfer tax while the funds are being managed for your children – or being held while your children are living.
The trust assets can either be distributed to your grandchildren or held for them in the trust and managed for their benefit by a designated trustee.
Some situations where a generation-skipping trust is useful
The generation-skipping trust can help when a child is going through a divorce. The funds can’t be attached by the spouse of a child. They also can’t be attached by creditors if your children incur debts.
Common assets placed into the generation-skipping trust
Florida estate planning lawyers can help seniors and those planning their wills and estate for any reason understand which assets are commonly placed in the generation-skipping trust. Generally, life insurance proceeds are made part of this type of trust. Stocks are also a common asset. Other assets such as a home and bank accounts can be part of the trust though there are often other strategies used for those assets. A lot depends on whether the person seeking estate planning help wants to sell the home or keep it in someone else’s hands. Sometimes, the client can retitle the home to reduce the estate taxes on the home. They may decide it’s best to sell the home when they pass away.
Key considerations in a generation-skipping trust
According to Investopedia (consult with your Florida estate planning attorney for a more thorough review), the grantor’s children never take possession of the assets. So they can avoid the transfer/estate taxes.
The recipient of the trust assets does not necessarily have to be a grandchild. The recipient can be a niece, a friend, or someone else. The key is that the assets are not available until after the child dies. The person getting the assets on the child’s death must be “at least 37 ½ years young than the grantor – the person drafting the estate planning documents. The grantee cannot be a spouse or a former spouse.
Estate tax considerations
Before the most recent tax changes which became law in 2017, estate taxes could range from 18-45 percent depending on the amount of the transfer. Estate taxes generally were not due unless the amount of the estate was worth millions of dollars.
The generation-skipping trust could/can be used to save up to $5 million in taxes – that is the exemption amount. The amount that would be placed in trust is much higher since that tax is only a percentage of the total gross amount. The amount of the exemption rose yearly from the date of enactment to nearly five and a half million tax-exemption in 2017.
Additional generation-skipping trust considerations
A generation-skipping trust is also commonly known as a “dynasty trust.” The trust must be irrevocable. This means the grantor of the trust cannot change his/her mind once the trust is created and the assets are placed in the trust.
The generation-skipping trust fundamentally saves on estate taxes in the following way. Without the generation-skipping trust, the grantor’s estate would pay estate taxes. Then when the child died, that child’s estate would also pay estate taxes. With the dynasty trust, the grantor’s estate does not pay estate taxes – only the child’s estate pays the taxes. In this way, there is only one estate tax payment, not two, on the trust assets.
The children’s rights
The children can have access to the trust asset income - which on estates worth millions of dollars can be quite substantial. They must, however, rely on the generation-skipping trust documents and the trustee to authorize and make the income distributions.
Generation-skipping trusts are complex legal documents. A thorough review should be made of what the grantor wants to do with the funds. The financial circumstances of the children should be reviewed. The attorney should review the financial circumstances and abilities of the grandchildren or other beneficiaries. For example, due consideration must be given to the fact that, at the time of the creation of the generation-skipping trust, the grandchildren may be minors. If a child dies before the grandchildren reach the age of majority, additional arrangements will be needed on behalf of the minor grandchild.
The 2017 tax law
In 2017, a new tax law was passed on December 22, 2017. This law doubled the number of assets that could be part of the generation-skipping trust. As of January 1, 2018, an individual can save $11.2 million on taxes. Couples could save twice that amount. There will be yearly adjustments that increase the amount to account for inflation until January 1, 2016. After January 1, 2016, the exemption amounts will revert to those that existed before the law. Unless Congress allows them to continue through an amendment or a new law.