It seems kind of strange in a way, but one of the primary goals of estate planning is to keep your assets intact as you are passing them along to your loved ones. The reason why this reality is rather odd is that you may naively think that what is yours is yours and when you pass away you simply leave your assets to your heirs in their entirety and that’s it. But unfortunately, the government feels as though you do not have that right. Estate tax is imposed when you bequeath your assets to your loved ones if the worth of your estate exceeds the standard exclusion amount.
This may not seem fair to some, but when you consider the rate of estate taxation the questionable nature of the tax is taken to another level. The estate tax was repealed for 2010, but it is scheduled to return in 2011 with a maximum rate of 55%. No, that’s not a typo.
So the estate tax is something that you want to avoid if you can, and one strategy that is sometimes used to achieve this end is the generation-skipping trust. With these trusts you typically name your grandchildren as the beneficiaries of the trust, “skipping” your children. You do have to pay a generation skipping transfer tax, and that too is returning in 2011, but the exemption is going to be around $1.3 million. So you can transfer assets equal to or less than that amount into the generation-skipping trust tax free.
By skipping a generation you avoid one level of taxation. If you were to leave the assets to your children, they would be subject to estate tax, and then if they were to turn around and leave those same assets to their own children, they would be taxed again. This can go on and on down the line until this original legacy was taxed into non-existence. Generation skipping trusts are a way to enable your family to keep what you bequeath to them rather than allowing the estate tax to consume your legacy over time.