Now that the smoke has cleared and we are working with a new set of estate tax parameters going forward in 2011 and 2012, the reality is kind of setting in with a thud. Yes, we are not going to be faced with the 55% maximum rate that was scheduled, and that is good. But the 35% rate that we are left with is still extreme, and when you consider the impact that it can have over a couple of generations it is staggering.

Let’s look at a very basic hypothetical scenario to illustrate the point. Suppose you started putting 10% of your paycheck into a savings account when you got your first part-time job while you were still in high school and continued doing so until you retired at 70 years old. On average you may have retained perhaps six dollars out of every ten that you earned after paying income and payroll taxes. So the money you saved came out of that remainder.

If you were able to plan wisely and hold on to your savings throughout your life you would be able to leave this money to your children. But when you do, the estate tax kicks in and takes 35% of it. As if this isn’t bad enough, if your children never spend that money and pass it one to their children, your grandchildren, it is once again subject to the estate tax and the majority of your savings are now in the IRS coffers.

This type of asset erosion can be avoided through the creation of a legacy trust. With these vehicles, which are also referred to as generation skipping trusts, you name your grandchildren as the beneficiaries rather than your children. Your children don’t own the assets so they are protected from any claimants. But your children can benefit from the trust, receiving trust income and using any property that may be placed in the trust. When your children die, your grandchildren assume ownership of the assets and the estate tax will be applicable to just that single transfer.