Generation Skipping Transfer Tax Planning
If you leave assets outright to your children (or any other beneficiary), those assets would later be included in your children’s estates and taxed accordingly. Instead, you can leave assets to trusts for your children. If properly drafted, the assets held in trust would be available for children’s benefit during their lifetimes but would not be includable in their taxable estates and eventually pass free of estate taxes to their descendants. Because the assets are not taxed in your children’s estates, this constitutes a Generation Skipping Transfer (GST) which is potentially subject to a GST Tax at a rate equal to the highest estate tax rate then in effect. However, every individual has a GST Tax exemption. If the GST Tax exemption is applied to assets passing to a trust, those assets could be exempt from the estate tax for multiple generations. These trusts are often referred to as Dynasty Trusts. It is important to properly utilize this GST Tax exemption by having the appropriate provisions in your estate plan.