Currently, the federal estate tax exemption is $11.58 million. This means that someone can gift this amount of money over the course of their lifetime before taxes on these transactions begin. Once a person exceeds this amount, the IRS is able to keep up to 40 percent of the remaining assets. Additionally, if your estate is directly giving assets to anyone that is 37.5 years younger than you—such as grandchildren or nieces and nephews—these assets will also be taxed by the generation-skipping transfer tax. The generation-skipping transfer tax is another 40 percent tax that goes on top of the federal estate tax.

For example, say you have a $12.58 million estate and give $11.58 million to your children and leave the remaining $1 million to your grandchildren. This $1 million will first be subject to the 40 percent federal estate tax bringing the total down to $600,000. However, when leaving this money to your grandchildren, this amount is again taxed. After applying both taxes, your grandchildren with only receive $360,000.

The reason why the government uses the generation-skipping transfer tax is so they can make up the difference they would have collected had the assets first gone to the grantor’s children and then grandchildren. Thus, if you have a large estate and would like to leave specific assets to your grandchildren or other family or friends that are 37.5 years your junior, you should use a generation-skipping trust to avoid substantial taxes.

What is a Generation-Skipping Trust

A generation-skipping trust is an irrevocable type of trust where the assets used to fund the trust pass the grantors children and go to their grandchildren. The grantor is the person that creates and funds the trust. By using this trust, the grantor’s children never officially own the assets within the account. However, the assets within the account must stay in the trust as long as the skipped generation is alive.

Grandchildren are the typical beneficiaries of this type of estate. However, anyone who is 37.5 years younger than the grantor of the trust can be a beneficiary to a generation-skipping trust. Thus, you could name a friend that is 37.5 years your junior to the trust. The one exception is for spouses. Even if your spouse is 37.5 years younger than you, they cannot be a beneficiary on the account.

Who Should Use a Generation-Skipping Trust

As stated above, a generation-skipping trust is essential for large estates leaving assets to their much younger family members. The assets in the trust must stay in the trust until the skipped generation dies. However, once the assets do pass to the beneficiaries, these assets only get taxed once instead of twice. Additionally, the assets within the trust may earn income. If this occurs, depending on the terms of the trust, this income can be taken out of the trust by both the skipped generation and the beneficiaries to the trust at any time. Finally, a generation-skipping trust can even protect the assets within the trust from claims by creditors.

One final note to understand before creating a generation-skipping trust is that this trust is irrevocable. If a trust is irrevocable, it cannot be modified or revoked in any way after it is initially established. This can cause problems if a recession occurs. In a recession, the grantor may need more assets to keep up their same retirement lifestyle. However, they will not have access to the assets in the generation-skipping trust.

Increasing the Generation-Skipping Trust Tax Exemption

If you have an especially large estate that you want to leave to your grandchildren or those 37.5 years younger than you, consider having your spouse put some of your estate assets into a generation-skipping trust under their name. In this case, you can leave over $23 million worth of assets before the federal estate tax applies.

Final Thoughts

Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia set up generation-skipping trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.

Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you effectively set up your generation-skipping trust to maximize the tax savings you receive from setting up this account in DC, Maryland, and Virginia.

Contact our DC Law Office for More Information

Finally, for more information regarding estate planning, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.