When you leave your inheritance behind for your loved ones, the government will charge an estate tax on any inheritance worth more than $11.4 million in 2019. And if you pass your inheritance along to your children, the IRS may charge them with another estate tax when they leave it to their children. So how can you avoid this taxation every generation?
When you set up your estate plan, you can use a generation-skipping trust to avoid an extra estate tax charge. With a generation-skipping trust, you give your inheritance directly to your grandchildren. This lets you “skip” paying an estate tax for one generation, preserving the assets you pass along.
Giving your inheritance directly to your grandchildren
With a generation-skipping trust, you set up a trust where your grandchildren are beneficiaries. You can also create a generation-skipping trust for anyone not in your family who is 37.5 years younger than you. Since your inheritance does not go to your children, who never have a legal claim to it, your assets avoid incurring a second estate tax when your children pass away.
Instead, the IRS only applies an estate tax when you pass away. This means you lose less of your estate to taxes.
Generation-skipping transfer tax
However, the IRS does have a tax on generation-skipping transfers. Like an estate tax, a generation-skipping transfer tax (GSTT) only applies if the beneficiary receives more than the federally exempt amount. In 2019, the exemption for GSTT is $11.4 million, but this is subject to change.
Avoiding estate taxes with a generation-skipping trust
A generation-skipping trust can help you avoid extra estate taxes. You can give your grandchildren a larger share of your assets while giving the IRS less. If used properly in consultation with an attorney and financial advisor, you can use a generation-skipping trust to keep more of your assets in the family.