When you are trying to map out an intelligent plan for the future one of the first things you must do is address the realities of the estate tax. At the current time the estate tax exclusion is $5 million and the top rate of the tax is 35%. This means that the portion of your estate that exceeds $5 million is subject to a tax that will take more than a third of it.
As if this arrangement wasn’t bad enough, these numbers are scheduled to take a turn for the worse. When the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires at the end of 2012 the maximum rate of the estate tax is going up to the 55% that was in place in 2001, and the exclusion is being reduced to the 2002 level of just $1 million. It should be noted that these figures could change if new legislation is passed before this tax relief act sunsets.
The clincher when you consider all of the above is that the estate tax is going to be imposed on every generation. The money that is left over after your heirs pay the estate tax after your death will be taxed again when your children leave these resources to your grandchildren. This can go on and on until only the exempt portion is left.
One very viable solution to this steady asset erosion is the creation of a generation-skipping trust. With these trusts you name your grandchildren as the beneficiaries instead of your children. But, your children can benefit from the trust and even direct its activity to some extent via a special power of appointment. When they pass on your grandchildren assume ownership of the assets. The generation-skipping transfer tax must be paid when you implement this strategy, but in essence two generations utilize the assets but there is only one instance of taxation to contend with.