GENERATION SKIPPING TRUSTS

You can leave assets to your kids- no big deal. But to leave assets to grandchildren and bypass your kids is a little more difficult. In such case, assets will still be taxed at regular estate tax rates PLUS an additional 55% on anything over $1,000,000. However, that's $1,000,000 in assets/gifts BEFORE you died. If you had actually bought a life insurance policy with $1,000,000 in payments, it could be worth, say, $5,000,000 when you died. And that will escape ALL tax if it had been bought in an irrevocable life insurance trust. Other advantages include that the assets in such trusts are beyond the claims of creditors and divorcing spouses against the beneficiaries. FW noted that a trust can only last so long under individual state laws but that Idaho, South Dakota and Wisconsin allow them to last indefinitely- as well as Delaware as long as real estate is not held. A corporate trustee will need to be named since they can last in perpetuity. Fees range from 1% to 3% so it ain't cheap. Be sure to use a trust protector agreement -or even give the beneficiaries the right to terminate the trust.

GENERATION SKIPPING TRUST: (1997) These are sometimes known as a dynasty trust since it is an attempt to pass assets down to later generations. Each person has the ability to pass $1,000,000 ($2,000,000 for a married couple) to later generations without additional taxation (though still subject to standard estate taxes.) In essence, these are long term trusts that can extend 21 years beyond the death of the last to die of all the trust beneficiaries. So if your youngest grandchild is a newborn and lives to age 85, then the trust can extend for 106 years (85 + 21 years). The key to the scenario is that while the trust does not escape initial estate taxes, it does escape taxes later on as the assets are distributed from the trust because the principal has already been taxed. The amount that the principal can grow to is enormous. Assume the trust was funded with $1,000,000 (probably with life insurance in order to leverage any funds to the maximum) and the estate tax is paid from other funds. Further assume it grows at 8% (2% less than the historic average for stocks) for 106 years before the final distribution. That's $3,490,744,654!!! However I'll be a little more realistic by using just $100,000 at the same time and return. That's still $349,074,465!!!!!! The trustees are normally given broad latitude to use the trust principal and/or principal for the benefit of the beneficiaries. One has considerable latitude that almost means full ownership (though never quite) and also might include spendthrift provisions that restricts a beneficiaries ability to the money and also protects the assets from creditors. Such clauses can also prevent a beneficiary's spouse from attaching the assets in case of a divorce. There can be an incentive to beneficiaries in that they won't get any money unless they can prove they are productive working members of society. (I did that on some straight trusts. The child had had problems with the law and would only be able to get an inheritance if he could show to the trustees satisfaction that he was working and not in problems with the law. Otherwise, it went to charity.)

GST (2001) Internal Revenue Service has issued final regulations relating to the application of the effective date rules of the generation-skipping transfer (GST) tax imposed under chapter 13 of the Internal Revenue Code. These regulations provide guidance with respect to the type of trust modifications that will not affect the exempt status of a trust. In addition, these regulations clarify the application of the effective date rules in the case of property transferred pursuant to the exercise of a general power of appointment. These regulations are necessary to provide guidance to taxpayers so that they may properly determine if chapter 13 of the Code is applicable to a particular trust.