Generation-skipping trusts can be a useful estate planning device, especially for individuals that are wanting to save some money on estate taxes, however, do you require one? Below is what you are going to want to know.
These trusts are an estate planning device designed to transfer assets in such a way that bypasses some estate taxes. This kind of trust, in which assets skip a generation, is also known as a dynasty trust, since it is usually used by wealthy families to hand down their fortune at a great estate tax savings.
The way in which generation-skipping trusts work
In a common inheritance, when Parent A bequeaths assets to Child B directly, these assets would be subjected to a federal estate tax (forty percent in 2023) when their worth does not fall below the estate tax exemption sum (twelve-point ninety-two million dollars in 2023). In turn, when Child B bequeaths the same assets to their child, A’s grandchild, they’re once more subjected to an estate tax and taxed once more.
This type of trust takes one step out from the estate tax formula by transferring assets straightforward from grandparent to grandchild (or great-grandchildren, other minor descendants, or un-related individuals that are at least thirty-seven and a half years younger than the grantor, commonly known as “skip persons”). Whereas some generation-skipping trusts involve just grandchildren, a lot involve many generations to increase the benefits of having the trust.
Specifically, this doesn’t mean that the individual in between is being disinherited completely—unless, obviously, that is what the grantor wishes for. The generation in between might inherit in different other ways, like direct gifts—always, obviously, with a focus toward the annual exemption sum for gifts (seventeen thousand dollars per individual in 2023) to make sure not to sustain an additional gift tax.
There aren’t any generation-skipping trust (GST) mandates that require distributions to be made instantly or even at the determination of the beneficiary. The grantor might decide to restrict the reasons to enable distributions, like for education, or might appoint an independent trustee to oversee the trust and adhere to its conditions. Consequently, inheriting could be a long way away for some skip individuals, subject to the conditions of the trust.
Generation-skipping trust tax
Technically, there aren’t any GST restrictions, but you should know of the generation-skipping trust tax (sometimes referred to as a generation-skipping transfer tax), in which implements a flat-tax of forty percent on generation-skipping transfers that surpass the exemption sum (twelve-point ninety-two million dollars in 2023). By laying claim to the exemption, you can utilize your GST to transfer up to that sum prior to it being conditional to the trust tax.
Basically, the generation-skipping trust tax is designed to catch and tax those inheritances that might otherwise have avoided taxation.
Disadvantages of a generation-skipping trust
For those with larger estates, there are not many disadvantages to a generation-skipping trust, however, one is the trust is irrevocable, meaning it cannot be altered or rescinded. Nevertheless, the trust’s conditions can be written with a focus towards the future and possible situations that could come up. Therefore, whereas the conditions themselves are not going to change, the trust might still have some adaptability within its own boundaries.
Since generation-skipping trusts and the taxes that might come with them are highly convoluted estate planning devices, you should speak with knowledgeable professionals, like those available through an online service, for counsel on if you need such a trust, in addition to how to create it to offer the most benefit for your estate and inheritors.
- Michelle Kaminsky, Esq. (2023, May 16). Using a generation skipping trust in your estate plan. LegalZoom. https://www.legalzoom.com/articles/using-a-generation-skipping-trust-in-your-estate-plan
Arizona Family Law
Naming guardians in your will can be part of your estate plan. You may think you’re too young or don’t have enough money to justify the expense, but if you have children, you have priceless assets. There are many considerations when naming guardians for your kids. However, the process doesn’t have to be expensive or complicated.
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