If death and taxes are inevitable, the estate tax combines the worst of both worlds. While frustrating, there are two pieces of good news regarding the estate tax. First, the estate tax doesn’t impact the majority of Americans in a significant way. The lifetime exclusion limit (before the estate tax kicks in) varies by year, but until 2026 it should be at least $12 million dollars. At that time, it will likely become between $5-$6 million.
The second piece of good news is that the estate tax is avoidable – to a point. While you cannot evade taxes in an illegal manner, there are legal tools designed to help minimize the impact of estate taxes. One such tool is called the Generation Skipping Trust.
A Generation Skipping Trust (GST) is a mechanism where assets placed in the trust are passed down to the grantor’s grandchildren (or someone at least 37.5 years younger than the grantor). By skipping over the middle generation, the assets avoid the estate tax which would be levied if the assets went to the children. This makes GSTs extremely useful wealth-preservation tools for individuals who would otherwise be subject to estate taxes.
One downside of a GST is that the grantor’s children (whom are usually the grandchildren’s parents) never legally own the assets. Keep in mind that the beneficiary of a GST doesn’t have to be a grandchild (as long as they are 37.5 years younger than you and they are not your current or former spouse).
The children who are skipped over aren’t entirely left out, however. Grantors can give children access to income generated from the GST’s assets, so long as the actual assets are in the trust for their grandchildren.
GSTs are useful for avoiding estate taxes, but beware of the GST tax! This is a separate tax (similar to an estate tax) was designed to specifically hit assets in GSTs. If you think a GST might be a good option for your family, contact an experienced attorney for personalized legal advice today!