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WEALTHY FAMILIES CAN BENEFIT FROM GENERATION SKIPPING TRUST

Estate Planning

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With a generation-skipping trust you can keep more of your hard-earned resources in the family for a longer period of time.

Why would there be any need to utilize an estate planning device like a generation-skipping trust to preserve your wealth? The answer can be broken down to three words: the estate tax.

We have a federal estate tax that is imposed on assets that you are transferring that exceed $5.25 million. The maximum rate of this tax is 40% in 2013. While New York estate tax is imposed on assets being transferred that exceed $1 million, with a graduated tax rate that caps at 16%. This tax is often criticized because people say it is an instance of double taxation. They say that the estate tax is levied on assets that are left over after taxes have been paid on earnings.

In fact, this description may not go far enough. The estate tax can be imposed over and over again as assets are passed from generation to generation, so the same assets can be taxed multiple times.

By conveying assets into a generation-skipping trust you can slow this process down considerably. With these devices you skip a generation and name your grandchildren as the beneficiaries.

Your children can benefit from assets that have been placed into the trust, so you are still providing something for them. However, they never own the assets outright so there is no estate tax imposed on that generation.

When they pass away the beneficiaries of the trust assume ownership of the assets. This transfer is taxable, but you facilitated the avoidance of one imposition of transfer taxes by creating the trust.

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Some people who are in a position to give life-changing amounts of money to their loved ones may take pause. If you were to give a young person a significant gift or inheritance he or she may see no reason to get an education and make an individual mark on the world.

One thing you could do if you felt this way would be to convey assets into a 529 college savings plan for the benefit of a future college student. And, if it is an issue you may actually be able to gain some estate tax efficiency in the process.

The way that it works is you put money into the account in much the same way as you would a 401(k) account. The assets that have been placed in the account are invested, and the growth is not subject to taxation as long as the student does wind up using the funds for college expenses.

From a tax perspective you are reducing the value of your taxable estate as you place money into the 529 account. However, you have to concern yourself with the gift tax because your contributions into the account for the benefit of another are considered to be taxable gifts.

The good news is that there is a $14,000 per year, per person gift tax exclusion that exists outside of the lifetime unified gift/estate tax exclusion. As a result you could fund the 529 account with $14,000 contributions each year to stay within this exclusion amount.

Ultimately you would be transferring assets out of your taxable estate for the benefit of a loved one in a tax-free manner

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Most Americans do not have Wills. We have discussed the problems with this before on this blog, but it is a subject that is always worth revisiting. If we did not think it was important for people to have estate plans, then we would not do what we do as estate planning attorneys.

However, we can only discuss the many reasons why you should have an estate plan so often. If you are reading this, then by now you know what many of those reasons are and you have heard them many times before. The real question is, if you know the reasons why you should have an estate plan, what is it that is stopping you from taking the next step and getting one?

The answer to that question will be different for different people. For some people it is time. For others it is the perceived expense of estate planning. Some people do not really want to think about their own mortality. It is important to think about why you have not yet gotten estate plan. What is your reason? If we know your reason, only then can we really help you understand how to overcome the problem and move forward with an estate plan.

If you would like to discuss why you do not have an estate plan, we would love to hear from you. We would like to talk about your reasons for not having one so that we can address them with you one on one.

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When a celebrity passes away, it is often interesting to see if there is anything that we can learn from their estate. All too often, we learn the many ways that the celebrity did not plan their estate in an ideal way. However, sometimes, we find out that the celebrity did everything the right way.

It is still early in the estate process, but at this point it appears that Lakers owner Jerry Buss did a good job in planning his estate. The big issue with his estate was the ownership of the basketball team. The value of the team is high enough that there are obvious estate tax issues. Buss needed a way to leave the franchise to his family without forcing a sale to pay the estate tax. Initial reports indicate that he did this and his children will inherit the franchise. That is good news for Lakers’ fans.

It also good news for business owners everywhere. It lets you know that it is possible to leave your business to your family and not lose it to the estate tax. There are several different ways to accomplish this. If you have a business that you would like to leave to your family, then talk to an estate planning attorney about what your options are and how to pick the best option for your business and for your family.

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We have previously told you about non-attorneys who set up websites to sell Living Trusts. It should go without saying to our savvy readers that purchasing a Living Trust from one of these websites is a terrible idea. Some of these same people have a new method to try to take your money and give bad estate planning advice.

The new trend is to offer what they call estate planning organizers. Supposedly, you can use these organizers to gather all of the information that you need to plan your estate. Once, you have it all organized, then you can take it to a real attorney and get your estate plan done more easily. While that may sound like a good idea, it is completely unnecessary. These organizers are selling for hundreds of dollars. That is unnecessary money spent before you even start your actual estate planning. A few file folders are really all that you need to organize your documents to take to an estate planning attorney.

Of course, that is not the only problem with these organizers. Many are merely being used as loss-leaders to later sell people the worthless Living Trusts. Know who you are dealing with online. Make sure that before you spend anything to get an estate plan you are dealing with a licensed attorney.

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Most people do not know that there are circumstances where they can create a valid Will that a court will later rule is invalid because it is too old and other things have happened in the intervening years. It is rare that it happens, but it does happen. It happened to the estate of the legendary actor Sir Peter Ustinov.

Ustinov created a Will in 1968 and then got remarried a few years later. His Will is subject to Swiss law. The courts in that country ruled that the Will was too old and invalidated by the intervening marriage. Because of that ruling, Ustinov’s estate is treated as if he died intestate. Ordinarily, that would mean that the estate would all go to his wife. However, he had children from his previous marriage. They claim that Ustinov later created Trusts in England that are still valid. Apparently, the Trusts leave the majority of the estate to the children. The parties have been fighting about the estate for 9 years and there is no end in sight.

The real issue is that Ustinov did not update his Will when the circumstances of his life changed. He should have updated his estate plan when he got remarried. He then should have looked at his plan every few years to make any other changes. His failure to do so has many people believing that his entire estate has been spent on lawyers.

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Often times in this space we take something for granted. We assume that our readers are interested in estate planning, so they must know what an estate plan is. That is our mistake. Many people do not really know what an estate plan is. With this post we hope to make up for that by telling those readers what an estate plan actually is. An estate plan is a collection of legal documents that are created for one of three basic purposes. Let’s look at those purposes.

1) To determine how a person’s property will be distributed after he or she passes away. This is the oldest purpose of estate planning and what is usually thought about when people hear the term. There are many ways that an estate plan can serve this purpose.

2) To determine how a person’s financial and healthcare affairs will be protected if he or she is incapacitated. This is a much newer purpose of estate planning, but it is equally important.

3) To determine who will care for a person’s minor children if the parents pass away. Not all estate plans serve this purpose as not everyone has minor children.

That’s it. An estate plan is a collection of legal documents that serve one of those three purposes.

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If you have a medical emergency and have to be hospitalized, where do you want your loved ones to be? Would you rather have them at the hospital talking to the doctors and hospital staff about your important medical issues, or would you rather your loved ones be at home frantically searching for your important health care documents?

Of course, you would rather have your loved ones at the hospital with you. However, in order to make sure that they can be there and assist with your health care decisions, then you not only need a Health Care Proxy, but you also need to make sure that your family knows where to find it in an emergency. For that to happen, they need to know that you have a Health Care Proxy, who you have designated to act on your behalf, and where you keep the Health Care Proxy. This makes sure that the person you have designated has the document to show the hospital staff as soon as possible. That way, if a decision needs to be made right away, your designated agent can make it.

Talk to an attorney about getting a Health Care Proxy, and then let your family know about it.

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ome big changes in your life are easy to recognize. When you have your first child, for example, you know that your life has dramatically changed. At these times, it is easy to see why you need to update your estate plan to reflect the changes.

However, there are other changes in your life that are harder to recognize because they occur gradually. For example, in your career, you will probably have many different raises and promotions. Each one individually is not a big change, but cumulatively the change can be quite dramatic. Because the change in income has taken place over such a long period of time, it is easy to downplay its significance. However, if you think about the change in income from the beginning of your career to now, you might see that it is very significant.

Income is just one thing in your life that you can gradually change over time. Think about other ways that your life has changed over time, especially since the last time that you updated your estate plan. If there have been significant changes, contact an experienced estate planning attorney and get an updated estate plan that takes those changes into account.