UPCOMING EVENTS

SEMINARS FOR SEPTEMBER 2017

MONROEVILLE
Tuesday, September 12, 2017
2:00PM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

MURRYSVLLE / DELMONT
Tuesday, September 12, 2017
7:00 PM
Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22

MURRYSVLLE / DELMONT
Thursday, September 14, 2017
2:00 PM CANCELLED DUE TO CONFLICT

Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22

MONROEVILLE
Thursday, September 14, 2017
7:00 PM 
 CANCELLED DUE TO CONFLICT

The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

MONROEVILLE
Saturday, September 16, 2017
9:30 AM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

 
 

 
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GENERATION SKIPPING TAX EXPLAINED

For those people who expect to see their estate be subject to substantial estate taxes, one enticing work-around has been to leave some property in their will to their grandchildren, skipping over their own children, based on their own calculation that the children will just end up leaving portions of their inheritance to the grandchildren. The goal is to avoid one layer of taxation by skipping over the tax which would be paid if the money was left first to the children, and then passed through the children's estate to the grandchildren.

This “generation skipping” can be worked to some advantage, but is by no means invisible to the IRS. There is a Generation Skipping Tax imposed on such transfers, which is assessed in addition to the Estate or Gift tax otherwise applicable, and is designed to make up for the potential lost revenue from such skips. The GST is a second round of taxation, imposed at the maximum estate tax rate, on transfers to a person who is two or more generations removed from the transferor. The most common example is grandparent to grandchild.

Three essential variations of the skip are addressed under current GST law. In the first, a "direct skip‟, a person transfers property, by gift or will, directly to a skip generation person, or to a trust in which a skip person has a financial interest. The second, a "termination skip‟, applies when a skip generation person benefits from the termination of an interest previously given to a non-skip person (such as the Grantor’s own child). Finally, a “distribution skip” occurs when a trust distributes income or principal to a skip generation person. The GST framework essentially borrows its exclusion from the Estate Tax exclusion amount. It does not add to the amount which you can convey tax free. So if, for example, in 2009 the estate tax exclusion amount is $3,500,000, and the GST exclusion amount is $3,500,000, then a grandparent could leave up to $3,500,000 free of estate and generation skipping tax to a grandchild. Any amount in excess of that sum would be subject to a whopping tax bill, including both the estate tax rate and the GST rate. Together, these taxes would almost completely consume the gift or inheritance, so most generation skipping planning is conducted within the confines of the applicable exclusion amount.

WHY BOTHER WITH SKIPPING A GENERATION?

A GST transfer can be worked to have multiple advantages for a donor making a gift to a skip generation person, or a testator leaving property to a skip generation person. Most simply, suppose that Grandmother and Grandfather combine their Gift Tax exclusion amount ($1,000,000 each) to gift property to a trust to benefit their grandchildren after the grandchildren turn 35. $2,000,000 is now in the trust, free of gift or GST tax. During the grandchildren's early lifetime, this money then has the opportunity to grow and appreciate, creating a larger trust corpus than could have been transferred tax-free if the grandparents delayed funding the trust. At the death of the grandparents, they could then leave more money for the trust in their will, up to the amount of the then-existing applicable exclusion amount. If the grandparents both died in 2009, when the applicable exclusion amount is $3,500,000, then each of their wills could conceivably leave $2,500,000 ($3,500,000 applicable exclusion amount, minus $1,000,000 consumed by lifetime gift), or a total of $5,000,000 additional inheritance. This is added to the initial 2,000,000 which has since been growing during the grandparents' lifetime in the grandchildren's trust. As such, a sizable sum of money can be left to skip generations.

In practice, most people do not use the maximum exclusion amount to favor the grandchildren, but instead their estate only provides for consuming some of the GST exclusion, with the majority of their assets passing to their own children. Nevertheless, there are substantial non-tax benefits which can be realized with a generation skipping trust, as with many trusts, including:

1. Protection of the grandchildren from their own folly through the use of spendthrift provisions in the trust, keeping it free of the hands of their current or future creditors;
2. Trust provisions which clarify and limit the Trustee's ability to distribute trust proceeds and principal, protecting the family assets from claims by a future ex-spouse of a grandchild;
3. Incorporation of terms giving the grandchildren a "limited power of appointment‟ in their will, which provides that the grandchild can leave any balance in the trust at their own death to a limited list of people which the grandparent who created the trust pre-approves, such as a requirement that the money be left to other descendants of the grandparents to assure that the family money stays in the family;
4. Insulating the trust assets against lawsuits and judgments which a grandchild might experience, such as a malpractice claim or an automobile accident caused by a grandchild; and
5. Distribution provisions calculated to temper the temptation of a trust fund, providing for modest distributions in early years when grandchildren should be making their own way in the world, but greater distributions later when they are more mature.

A generation skipping transfer can be a part of many estate plans, and can usually accomplish most, if not all, of a grandparent's goals within the limits of the GST exclusion.