If you are seeking a way to preserve as much of your wealth as possible for future generations, a generation-skipping trust may be a crucial part of your estate plan. A generation-skipping trust has many advantages, not least of all keeping more of your wealth within your family or specified beneficiaries and keeping more of it out of the hands of the taxman. The highly proficient estate planning attorneys of Battaglia, Ross, Dicus and McQuaid, P.A. are happy to consult with you to determine if a generation-skipping trust is right for your situation.
What is a Generation-Skipping Trust?
Put simply, a generation-skipping trust is a kind of trust that does exactly what it states, it skips a generation. This means that, by law, the beneficiary of this trust must be at least 37.5 years younger than the settlor, or the founder of the trust. This type of trust also falls into the category of an irrevocable trust in the state of Florida, which means the assets transferred into the trust cannot be reclaimed by the settlor after those assets are transferred. The new ownership of the assets is permanent.
The skipping ability of a generation-skipping trust has the benefit of allowing wealth transfer without having to pay 2 rounds of estate taxes. For example, if you transferred assets to your children and then they transfer those assets to their children, the IRS would take a cut each time there is a transfer.
How Exactly Does a Generation-Skipping Trust Work?
When setting up a generation-skipping trust, someone must be designated the “skip person.” The laws of the United States have strict rules defining who can be designated the “skip person.” According to U.S. Code § 2613 a “skip person” is “a natural person assigned to a generation which is 2 or more generations below the generation assignment of the transferor.”
Once a specific “skip person” is established to be within the bounds of the law, the settlor can then transfer assets into the generation-skipping trust. However, you must keep in mind that there is an exemption limit placed upon that amount of assets that can be transferred into the generation-skipping trust. For example, if you wanted to transfer $50 million this way, that would not be possible without being subject to federal taxation. The exemption limit is constantly adjusted for inflation and currently sits at $11.4 million for individuals and $22.8 million for couples. Transfers in excess of these amounts must pay the generation-skipping transfer tax, which currently sits at 40%.
Now, the Good News
As a Florida resident, you may know that Florida has no state income tax, but did you know that Florida also has no separate estate tax? There are many states in our great union that require the payment of state-level income tax but also state-level estate tax upon death. However, since Florida has neither of those types of taxes, and because the federal government does not consider inherited property as income for federal tax purposes, Florida residents will not pay taxes on these distributions. In short, this means that the “skip person” will ultimately inherit the assets tax free.
The Better News
Additionally, there is no prohibition on the generation between you and the “skip person” drawing income from the assets in the generation-skipping trust. Let’s imagine that the assets you place into your generation-skipping trust appreciate over time at a rate of 10% a year. You could create a generation-skipping trust, placing in it stocks or other assets worth $1 million and guarantee a substantial income to your children for the remainder of their lives or the duration of the trust. If your goal is to preserve an inheritance of your wealth for your family far into the future and seriously minimize the tax liability on the transfer, a generation-skipping trust is certainly an avenue to contemplate. With a generation-skipping trust, no family member or named beneficiary needs to be left out in order to transfer the wealth and an important thing to remember is that the ultimate beneficiary does not have to be a blood relative. Most of our estate planning clients choose to keep their assets within the family, but there are a number of cases that we have advised on where this is not the case.
Crucially, you have spent your life accumulating the wealth you own. You’ve worked hard for it, invested wisely, and spent frugally. Over time, your efforts have paid off and are paying dividends for you and your loved ones. With a generation-skipping trust, no estate taxes will be paid on the assets held within it as long as either the generation-skipping tax has been paid or the generation-skipping tax exemption has been applied. Furthermore, the trust can be set up to have future generations appointed as beneficiaries or the trustee can do this himself, meaning no estate taxes have to be paid even if the trust lasts for more than 100 years. Make absolutely sure you keep as much of the fruits of your hard-earned labor where you see fit. The estate planning attorneys at Battaglia, Ross, Dicus and McQuaid, P.A. are experts in designing a visionary plan to cement your legacy for many years to come.
Discuss Your Situation with a Professional Estate Planning Attorney Today!
When designing an estate plan to suit your particular needs, one of the most important things to consider is how you would like your wishes carried out after your passing. While there is no fool-proof way to ensure tax free transfers of assets to your descendants or named beneficiaries, trusts are a much safer option when it comes to minimizing tax liability. No one type of trust covers all bases, however, so it is important to thoughtfully discuss the pros and cons from all sides with a competent estate planning attorney. When it comes to estate planning advice and unparalleled levels of service, the attorneys at Battaglia, Ross, Dicus and McQuaid, P.A. are unrivaled. Call us for a consultation today!