You don't have to be in your twilight years to take advantage of a generation-skipping trust. You can create such a trust any time during your life, and make lifetime transfers to that trust (you can use up to $1 million of the $2 million exemption during your lifetime). Any asset that might grow appreciably is a candidate for such a trust. "For families that are establishing a wealth transfer plan, my advice is to place appreciating assets in a generation-skipping trust and let these assets grow outside your taxable estate," attorney Philip Feldman says.
It works this way. Any appreciable asset -- a piece of real estate, stock in a private company that may go public, hedge fund assets -- is a candidate for a generation-skipping trust. Say an engineer who joins a start-up receives stock valued at a dime a share. If she's given 1 million shares, they're worth $100,000. If she places that stock in a generation-skipping trust, when the company goes public at $20 a share, the trust suddenly owns an asset worth not $100,000 but $20 million.
Because it's in a trust, that appreciation is not taxable, even when the engineer and her spouse die. "You can keep the money available to the family and use it when they need it," Feldman says. And none of this $20 million will be subject to gift or estate tax as the assets pass to the children and grandchildren. Had the engineer held the stock personally, the $20 million (and all of the investment growth on that $20 million) would have been taxed at $9 million or more as it passed to the kids, and another 45 percent tax would have been assessed at the death of the children.
Feldman also points out that life insurance policies are often excellent candidates for a generation-skipping trust, but it's critical to get expert professional advice to navigate some of the technical requirements.
Learning how to avoid the gift tax.
what about grand children not born at the time teh trust say (Gallo trust) was established. Are teyy still beneficiaries?
great article. I have children benefiting a Generation S.trust. My sisters do not. Where is thier benefit as second generation, if ever?
Is the amount received by the grandchildren taxed as income or are no taxes paid on the amount by the receiver