How Does Generation Skipping Work, And Why Do It?
You may already know that in this country, if you get an inheritance, there is a chance that your estate may have to pay estate taxes if you leave property to your beneficiaries. Thankfully, the current estate tax threshold is about $12,000,000 (meaning that if less than that amount is being left to beneficiaries, there is no estate tax assessed), but that amount can, and does change.
If it does change—or if your estate does plan on leaving more than that amount to beneficiaries—you may want to think of ways to avoid paying that estate tax.
Skip a Generation?
One way to do this is through generation skipping, or a generation skipping trust. As the name implies, this just means that your assets aren’t going to your immediate relatives—they are going to the next generation of relatives (so, instead of leaving property to your son, it would be left to your grandson, even if he or she did not yet exist).
To make that happen, the law requires that the beneficiary be at least 37 ½ years younger than you are. Anybody can be a beneficiary; it does not have to be an actual relative. However, spouses cannot be beneficiaries.
What about your immediate children? They are being skipped, so are they left in the cold, with nothing to inherit? The answer is no; immediate children can still earn and receive income generated by the money or assets left to the next generation.
So, for example, if the money left to grandchildren was yielding revenue in a CD, or property was yielding rental money, immediate children could receive that money in your estate plan, even though they don’t own the actual asset generating that revenue.
There’s Still a Tax
This is, technically, a loophole in the tax code, so congress tried to mitigate the losses by assessing a generation skipping tax (yes, a tax on a trust that is designed to avoid other types of taxes). Thankfully though, if the property being left is valued at under $11.7 million, no tax will need to be paid—and that amount doubles if both spouses jointly establish the generation skipping trust.
No Double Taxation
Also note that when your grandchildren or whomever you designate does get access to the assets left in your state, there will still be estate taxes owed to the government assuming the amount left is more than the legal limit.
However, the generation skipping trust does avoid double taxation—for example, your estate normally would be taxed when you leave property to your kids, and then again, when your kids pass and leave property to their kids. But you effectively skip over one of those two assessments of taxes, in that situation, with the generation skipping trust.
Make sure your estate plan works for you, and helps your beneficiaries in the best way possible. Call the Torrance will and estate attorneys at Samuel Ford Law today.