Generation Skipping Transfers No Longer for Punishing the Kids
The recent article in the Wall Street Journal titled “Shutting Out the Kids from the Family Fortune” illustrates the evolution of the generation-skipping transfer over time. The article tells the story of a timber baron named Wellington R. Burt, who in 1919 died with one of America’s largest multi-million dollar estates.
Mr. Burt, in his unusual will, declared that his fortune would not go to his kids, but would pass to his heir 21 years after the death of his grandchildren. The distribution of roughly $100 million is now set to take place and it will be done without his children ever benefitting from the inheritance (although, the article does point out that his “favorite son” received $30,000 distributions during his lifetime).
But what may have started out in Mr. Burt’s time as a way to preempt greedy children from an inheritance fight, generation-skipping transfers have become commonly used estate planning tools today.
Due to the use of generation-skipping transfers to avoid estate taxes, the federal government began enacting generation-skipping transfer tax laws in 1976, and it imposed a tax equal to the estate or gift tax that was avoided. In 1986, Congress repealed the 1976 law and imposed a new generation-skipping tax at a flat rate equal to the highest marginal estate and gift bracket applicable at the time of the gift. This also led to generation-skipping transfer tax exemptions becoming available to tax payers making such transfers in their wills or trusts.
In 2009, before the expiration of the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”), each taxpayer was allowed a $3,500,000 exemption from the generation-skipping tax, meaning that only aggregate gifts and bequests to grandchildren or younger beneficiaries in excess of $3,500,000 (or $7,000,000 for married couples) would be subject to the generation-skipping transfer tax. In 2010, the generation-skipping transfer tax was repealed for a year along with the federal estate tax.
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Authorization Act. The act imposed a generation-skipping transfer tax retroactively for 2010, and increased the exemption amount to $5 million. It also lowered the generation-skipping transfer tax rate to 35% for 2011 and 2012, and oddly enough, a zero percent rate for 2010. This created a unique estate planning opportunity for some in the last two weeks of 2010.
While there still may be some instances when parents decide to bypass their children when distributing their wealth to specifically disinherit them, the days of “mean” Mr. Wellington R. Burt are over. Instead, the generation-skipping transfer has evolved to allow families to bypass their children as a mechanism to preserve their hard earned wealth for the benefit of their families.
Parents who might otherwise leave their entire estates outright to their children instead create generation-skipping transfer tax exempt trusts for their children and grandchildren funded with cash or property up to the available generation-skipping transfer tax exemption. Doing so allows these trusts to escape all transfer taxes when the children die and will pass tax-free to the grandchildren. Additionally the trust may be protected from the claims of creditors. Had the trust property been left to the children outright, the property would be subject to such claims.
Crumpton Law LLC and its attorneys practice estate planning law in Columbus, Ohio, and throughout the surrounding counties and cities of Franklin County, Delaware County, Union County, Madison County, Pickaway County, Fairfield County, Licking County, Dublin, Powell, Lewis Center, Worthington, Westerville, New Albany, Gahanna, Bexley, Reynoldsburg, Canal Winchester, Grove City, Hilliard and Upper Arlington.