The estate tax is something that you have to take very seriously when you are engaged in the process of inheritance planning because it can have life-changing impact on succeeding generations. As of this writing the maximum rate of the estate tax is 35%, and the exclusion sits at $5 million. This is an incredibly big bite but it is going to get worse if the laws stay the same as they are right now. Unless there is new legislation passed in the interim, the top rate of the estate tax in 2013 is going to rise to 55%, and the exclusion is going to go all the way down to $1 million.
When you consider how a tax that takes more than half of the taxable portion of your estate will impact your children you can immediately see why this is a matter that must be addressed. But if you take it a step further, the resources that you leave to your children will be subject to the estate tax once again when they are leaving a legacy to your grandchildren, and this pattern can continue. So you have money that was originally the remainder you had left after paying taxes all of your life being taxed again and again after you pass away.
This is something that is simply not acceptable to most people, but the good news is that there are estate planning tools that can be utilized to mitigate the damage. One of these is the generation-skipping trust.
With these vehicles you name your grandchildren as the beneficiaries rather than your children, skipping a generation. Your children are not left out in the cold however; they can benefit from assets in the trust. They simply don’t own them so the funding of the trust is not subject to the estate tax. When the children die your grandchildren assume ownership of the funds and the generation skipping transfer tax applies but there is just one instance of taxation over two generations.