When you pass away, it is understandable that you want to pass down as much property as you can to your loved ones—hard-earned assets that you worked a lifetime to acquire. For most people, the federal estate tax does not apply to their assets, especially now that the minimum taxable estate has doubled to $11.2 million. Any estate smaller than this will not be taxed. However, if your estate does reach the taxable level, the federal government can take up to 40 percent or more of your estate, which is the average tax for a taxable estate.
There are methods to reduce the tax you have to pay, and the average person who paid estate taxes in 2013 (the effective tax rate) was just 16.6 percent, according to Time Money. One practical way to reduce the size of your estate, and therefore bypass estate tax, is to create what is called a generation skipping trust.
Generation Skipping Trust May be Better than Yearly and Lifetime Gifting
Just one out of 700 Americans have an estate large enough to tax. As such it is rare for any estate to have to pay estate tax nowadays. Yearly gifts, per person, can be up to $15,000 without being taxed. A husband and wife can each give $15,000 to as many heirs as they want, each year, without being taxed. However, if the lifetime gifting amount is reached for either, the gifts begin to fall under the estate tax and gift tax exclusion, according to Forbes.
One method of reducing the size of one’s estate is to begin making yearly maximum gifts to children and grandchildren; still, even this may not be enough to reduce your estate in time, and again the gifts can eventually exceed the lifetime gifting amount if enough people are gifted. A generation skipping trust can be set up for your grandchildren, skipping the generation of your children and therefore bypassing estate tax as well.
Who is Eligible?
In addition to applying to grandchildren, you can set up a generation skipping trust for anyone who is not related to you and is at least 37.5 years younger than you, other than your spouse or ex-spouse. A bonus is that your children can profit from this generation skipping trust as well, by utilizing the profits made by the assets within the trust.
Reach Out to an Estate Planning Attorney Today
An experienced DuPage County estate planning attorney can help explain the benefits of a generation skipping trust, as well as help you set it up to minimize or cut out all of the taxes you would have to pay otherwise. Contact Momkus McCluskey LLC for more information.