Wednesday, December 12, 2018

Why Skipping a Generation Can Be a Good Thing

Ask The CFP® Practitioner



“The true meaning of life is to plant trees,
under whose shade you do not expect to sit.”

~ Nelson Henderson, Scottish rugby player (1865-1943)


Question: Could you explain generation-skipping trusts and how they might benefit our family?

Answer: By definition, generation-skipping trusts (GSTs) are any trust whose beneficiaries are two or more generations below the grantor. For example, as a grandmother, I would be the grantor granting assets to an irrevocable trust naming my grandchildren as beneficiaries.

GSTs are designed to minimize estate taxes by transferring assets to skip persons (grandchildren or great-grandchildren) and limit distributions of income to intermediary generations or your own children. The third generation inherits directly from the first generation. The second generation may receive income from the property the third generation will eventually own, allowing you, the grantor, to transfer your wealth in a potentially more tax-efficient manner.

The new tax law, passed in late December 2017, temporarily raised the lifetime exclusion for estate, gift and generation-skipping taxes to just over $11 million per person. The higher exemption, which adjusts for inflation while in effect, sunsets at the end of 2025.

That means, for the next eight years, each person can gift or transfer up to $11.2 million without having to pay federal gift or estate taxes. That amount doubles for couples, and can be combined with the annual gift exclusion, which allows you to give $15,000 in 2018 to any number of people without reducing your federal lifetime gift tax exemption. Details are available at www.irs.gov.

Unless you’re one of the wealthiest Americans and have an estate greater than $11.2 million, for the time being, federal estate taxes will be a non-issue for most people. But the tax is steep on the amount that exceeds the limit; forty percent is a big chunk to pay the federal government. Note that the generation-skipping transfer (GST) tax, imposed at a 40% flat rate, is in addition to gift or estate tax, depending on whether the transfer is made during life or at death.

There are three key reasons why you’d want to consider using a generation-skipping trust, which as illustrated, bypasses your immediate children in order to benefit your grandchildren even more down the line.

  To help protect significant family wealth from substantial future tax liability. This is especially beneficial if your children are financially comfortable, and you want to provide for your grandchildren or even your great-grandchildren. Your children can benefit from the income generated by the assets in the trust, but they don’t own the assets in the trust and can be given no access to the trust principal or limited access at the trustee’s discretion, depending on your objectives. The underlying assets will transfer tax free to the generation after.

  You can fund a generation-skipping trust with up to $11.2 million, allocating your lifetime exemption and your GST exemption to the trust to avoid gift tax as well as future GST tax liability.

  Once the exemption is applied, future appreciation of the trust assets is allocated to the trust beneficiaries directly. If the trust is irrevocable, your family won’t have to pay GST tax even if the trust assets appreciate considerably after your gift is complete.

Of course, when it comes to financial planning, taxes shouldn’t be the tail that wags the dog, but they should be considered. Depending on individual situations, family dynamics and assets you may want to explore this technique in greater detail with your team of trusted financial professionals, including your CERTIFIED FINANCIAL PLANNER™ practitioner.

This technique is a way to potentially transfer more wealth to your family through existing or newly formed irrevocable trusts, including generation-skipping trusts. You’ll want professional guidance to help you take maximum advantage of the generation-skipping transfer tax lifetime exemption. Stay focused and plan accordingly.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Raymond James does not provide tax or legal advice. You should discuss tax or legal matters with the appropriate professional. Views expressed are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author’s opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S.”

This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/InvestmentInsights.

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