Most Americans will tell you that they are not opposed to paying their fair share of taxes. However, the word “fair” is the key to the debate, and when it comes to the estate tax many people have a hard time wrapping their heads around it.
We have passed along the news about the reduction in the maximum estate tax rate to 35%, and because it is less than the 55% that had been scheduled this seems like a big win for tax relief advocates. But the reality is that this new rate is kind of like 35 lashes rather than 55; it is not a picnic in the park by any means.
Let’s look at the notion of fair taxation. Say you earned a paycheck all of your life and set aside a certain portion of your pay every week for 50 years. By the time you got each check you were holding perhaps sixty cents of every dollar you actually earned after paying income and payroll taxes. Still, you were disciplined and responsible enough to save some of that remainder consistently in an effort to leave something behind for your children and grandchildren.
But when you pass away with your children as your heirs, the federal government is going to take 35% of those savings. Now your children have the 65% remainder. If they never spend it and hand it down to your grandchildren, it will be bitten by the estate tax yet again. Now that nest egg that you worked so hard to accumulate has been eroded by more than half. What’s fair about that?
The way that you can avoid this fate is through the creation of a legacy trust, which is another way of referring to the generation skipping trust. You fund the vehicle but you name your grandchildren as the beneficiaries instead of your children.
Your children can benefit from the assets in the trust, deriving income from the trust’s earnings and even residing in property that has been placed into the trust. When your children pass away, the trust assets are transferred to your grandchildren and the estate tax must be paid just once rather than twice, minimizing the erosion of the assets.