For taxpayer’s with a moderate to large estate in the Quad Cities, tax avoidance is a common estate planning objective. Considering the fact that the gift and estate tax is set at 40 percent, this seems a wise goal for anyone planning an estate. One other tax that a taxpayer should understand when planning his or her estate is the generation skipping tax. The generation skipping tax is a rather complicated tax in what is universally considered to be a complicated tax system. Therefore, it is best to consult with your Quad Cities estate planning attorney about how the tax could impact your specific estate plan; however, a general overview of the tax may be a benefit in the meantime.
Prior to the age of tax reforms, in the latter half of the 20th century, wealthy families commonly used loopholes in the tax code to pass down extremely large estates without paying much, if any, in estate taxes. One of those loopholes was the use of life estates. Essentially, a series of successive life estates was used to pass down the family wealth through the generations without paying gift and estate taxes. This was possible because the assets were never actually transferred into anyone’s name. Creative use of trust was another common strategy used to pass wealth down without incurring gift and estate taxes. Understandably, the federal government was not happy about losing out on the tax revenue that should have been generated from these estates and, therefore, enacted the “generations skipping tax”, or GST in 1976. Though the original GST was repealed, the current version has been in place since 1986.
The GST taxes assets that should have been, but were not, taxed at the gift and estate level. In other words, assets that manage to avoid gift and estate taxes are taxed using the GST. Those life estates mentioned earlier, for instance, would be taxed using the GST. An even more common example applies to trust established for multiple generations. Imagine that you place $20 million worth of assets into a family trust. Your children and grandchildren all benefit from the interest earned on the trust assets; however, the principal is not distributed until the death of the last child. At that time, the principal is distributed to all surviving grandchildren. Your children benefited from the “gift”, yet taxes were never paid. The GST is intended to catch situations such as this and ensure that taxes are collected.
Because of the complexity of the generation skipping tax in the Quad Cities, and the U.S. tax system in general, it is best to consult with your estate planning attorney with specific questions.
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