You may hear about this tax and decide that you will give gifts to your loved ones to get around it. This was possible shortly after the enactment of the estate tax in 1916, but a gift tax was put into place to close this window of opportunity. The gift tax is unified with the estate tax.
The third federal transfer tax that we have is the generation-skipping transfer tax. This tax can be applied on transfers to family members who are at least two generations younger than you are. It can also be applied on transfers to people that you are not related to who are at least 37.5 years your junior.
There is a federal transfer tax exclusion that applies to all three of these taxes. The exclusion is the amount that can be transferred before the estate tax would be applied. For the rest of 2015, the amount of this exclusion is $5.43 million.
This generation-skipping transfer tax was established to stop people from using dynasty trusts to pass down assets from generation to generation free of transfer taxes. However, the utilization of a generation-skipping trust can still have tax efficiency value when certain circumstances exist.
For example, let’s say you fund a generation-skipping trust with $5.43 million worth of assets, and you make your grandchildren the final beneficiaries.
Your children could still benefit from assets that are contained within the trust. They could receive the earnings from the trust’s assets, and transfer taxes would not be applicable.
Plus, the assets would be protected if one of the children was to go through a divorce or become the target of a lawsuit.
After your children pass away, your grandchildren could assume ownership of the $5.43 million remainder free of any transfer tax consequences.
Tax Efficiency Strategies
High net worth families must certainly take steps to gain transfer tax efficiency given the rather robust 40 percent maximum rate of the death taxes. A generation-skipping trust can be part of the plan when certain circumstances exist, but there are other types of trusts that can be utilized to transfer assets at a tax discount.
If you discuss your situation in detail with a licensed estate planning attorney, you can position your assets in the optimal manner so that you can maximize your wealth as you are passing it along to the people that you love. Our firm would be glad to help if you are ready to get started.
To take the first step, register to attend one of our upcoming Living Trust Seminars: Naples FL Estate Planning Attorneys.