When it comes to estate planning, generation-skipping transfer trusts have become more and more integrated into the conversation. If you haven’t encountered the term before, it refers to a legally-binding trust that designates a grandchild as the beneficiary of the trust – thus, passing over your own children and into the hands of the following generation.
And to be clear, there’s no blood-relation required in order to establish a generation-skipping trust. As long as your designee isn’t your spouse (or ex-spouse) and the recipient is at least 37.5 years younger than you, they can legally be named as the beneficiary in a generation-skipping trust. To better understand this potential option, let’s delve deeper into this facet of estate planning.
Generation-Skipping Trusts and Taxes
So, why are so many individuals taking this path into consideration? By bypassing a generation and leaving your assets to a subsequent group of heirs, you’ll provide loved ones with a myriad of tax advantages. For example, let’s say you elect to leave your inheritance to your grandchildren. When the skipped generation, likely your children, pass away, your assets will be transferred tax-free to the beneficiary. Ensuring your nest egg isn’t subjected to an estate or inheritance tax twice is the overarching benefit and driving factor behind traveling this route.
Is a Generation-Skipping Transfer Trust Right For You?
In 2020, the threshold for federal estate tax was a whopping $11.58 million, with some states applying their own supplemental estate tax on top of federal deductions. There are also several states that charge an inheritance tax once the money has been shifted over to the beneficiary. By leveraging a generation-skipping trust as part of your estate planning strategy, you’ll effectively avoid a round of inheritance tax.
For those in possession of a particularly large estate, a generation-skipping trust is advantageous for capital preservation. The one caveat to keep in mind is that trusts are irrevocable – a.k.a. once you opt to put money into one, it cannot be removed.
According to the Tax Policy Center, “Congress enacted the generation-skipping transfer (GST) tax and linked all three taxes [estate, gift, and generation-skipping transfer taxes] into a unified estate and gift tax” with the intention of bridging the gap that previously allowed families to circumvent estate taxes. As a result, any generation-skipping trust distribution that exceeds $11.40 million is subject to a flat tax rate of 40% (in addition to any estate or inheritance taxes that are applicable).
Trust & Wills in Savannah, GA
Because a generation-skipping trust is complicated in nature, it’s highly recommended that you align yourself with a financial professional to ensure you’re properly protecting yourself. To set yourself up for success, you want to partner with an expert in the field to fully understand all your options and create an optimal plan for the future.