Generation-skipping Transfer Tax - Advantages of Using Exemptions From The Tax

Advantages of Using Exemptions From The Tax

Many individuals who might otherwise leave their entire estates outright to their children allocate their generation-skipping exemption to transfers to generation-skipping trusts for the benefit of their children and grandchildren. Such trusts will be funded with cash or property worth up to the available generation-skipping transfer tax exemption. If the term of such a trust is not limited, the trusts are often referred to as dynasty trusts.

Utilizing the generation-skipping tax exemption in this manner offers two important advantages:

• The trust will escape all transfer taxes when the children die and will pass tax-free to the grandchildren.

• The trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. Had the trust property been left to the children outright, the property would be subject to such claims.

In some states, property acquired by gift or inheritance from a third party is not subject to division in divorce proceedings and would not be subject to claims by an ex-spouse.

The child may serve as trustee of the trust and hence control trust investment policy. If so, it would be necessary to limit the child's discretionary powers over distributions of income and principal by an "ascertainable standard" in order to avoid subjecting the trust to federal estate taxation at the child's death. Appointing the child as sole trustee may subject the trust to claims of the child's creditors.