16 May Generation Skipping Trust

There is a famous saying: “It’s not so much what you earn that’s important, it’s what you can keep.” Everyone is on the lookout for ways to reduce their tax burden. Phelps LaClair is a 2nd-generation estate planning law firm serving Chandler, Mesa, Phoenix and Scottsdale. We know that everytime a large estate passes from one generation to the next, there is a hefty 40% estate tax that is levied. We also know that there are ways to reduce this estate tax liability. One of those is by creating a generation-skipping trust, or GST.

What is a Generation-Skipping Trust?

A GST is a trust whose assets are passed down by the grantor to the grandchildren, skipping the children’s generation. By doing this, the estate’s assets will not carry the same estate tax liability that would be applied to the grantor’s children. A GST can be either revocable or irrevocable. A GST is an effective way to preserve wealth for large estates with significant assets.

How it Works

Most people create an estate plan to benefit their surviving spouse and children. A beneficiary who inherits assets worth more than $11.58 million dollars is liable to pay a 40% estate tax. If the beneficiary is a child of the grantor, the tax is due. If that child then passes on to his/her own children an amount more than the exemption, the original estate will have been taxed twice. By using a GST, the estate will skip a generation and only be taxed once. This means, however, that the children of the grantor will not receive a large inheritance.

While the skip generation is often grandchildren, the beneficiary of a GST doesn’t need to be a blood relative of the grantor. It can be anyone who is not a spouse or ex-spouse, and is at least 37.5 years younger than the grantor. A generation-skipping trust can also name multigenerational beneficiaries such as great grandchildren, great nieces, nephews and so on.

When you fund a GST, you have a lifetime exemption from estate taxes. Currently, that rate is $11.58 million dollars for an individual, or $23.16 million for a married couple. In addition to this exemption, you can make annual exclusion gifts of up to $15,000 without incurring the GST transfer tax. You can do this with as many grandchildren, great grandchildren and other qualified beneficiaries as you like. By doing this, you can avoid paying taxes on the annual gifts and reduce the overall value of the estate, reducing the estate tax liability as well.

Other advantages

When the assets in a GST generate income, the grantor can give children access to that income while leaving the assets in trust to the skip generation. Trust assets cannot be touched by an adult child’s divorced spouse. The assets also cannot be garnered by an adult child’s creditors.

In addition, there is a rule that governs the deceased parents of a GST beneficiary. If the grandchild’s parents have passed away, the grandchild is no longer a skip generation. Therefore, gifts from the grandparents aren’t subject to the GST transfer tax.

Estate Planning Professionals

There are many ways to reduce estate tax liability. A generation-skipping trust is only one of them. A complex subject such as this is best served by professional estate planners. With over 40 years of experience in estate planning, Phelps LaClair is well positioned to serve you. Doing it right can mean massive tax savings down the road for future generations. It’s one way to preserve the wealth you have accumulated. Call us today for a free first time consultation. Let us help you maximize the benefits to you and your heirs.

Images used under creative commons license (Commerical Use) 05/16/2020  Photo by Angelique Downing from Burst