Depending on the extent of your assets addressing the realities of the estate tax can be the most important consideration when you are planning your estate. If you are not aware of the details surrounding this tax you will probably be amazed to hear that it is presently coming in at a 35% rate. And if the the laws stay exactly as they are right now this is going to increase to a maximum of 55% in the beginning of 2013.

Yes, you read that correctly. Unless there is new legislation passed in the meantime to alter the parameters the estate tax will consume more of your estate’s taxable value than it leaves behind when next year comes to a close.

When you consider what your family members would be able to do with the money that would be going to the tax man this situation really hits home. Right now the estate tax exclusion is $5 million so only the portion of your estate that exceeds that amount would be subject to the tax. But this is scheduled to be reduced to just $1 million in 2013 although changes are possible in the meantime.

The thing to consider beyond a single round of harsh taxation is multi-generational asset erosion. Let’s say you leave an inheritance to your children that is subject to the estate tax. If they never touch that money and actually add to it, when they die the money that you left to your children will be taxed again as they leave it to your grandchildren. This can be avoided through the creation of a generation-skipping trust.

With these trusts you name your grandchildren as the beneficiaries rather than your children. However, your children can benefit from the trust, receiving cash distributions and even living in property owned by the trust. When they die your grandchildren assume ownership of the funds and the generation-skipping transfer tax is applicable, but two generations used the resources and they were taxed only once.