Long-term estate planning Featured

10:08am EDT March 30, 2006
With a lifetime gift to a generation-skipping transfer tax trust, you can eliminate estate taxes on up to $1 million of assets in your child’s estate, according to Sherry Maynard, financial consultant, vice president and Chartered Wealth Advisor at Hilliard Lyons in Dublin.

“High net-worth clients are most likely to take advantage of this kind of trust,” says Maynard.

If you’re a grandparent and are wealthy enough to consider providing for both your children and grandchildren, if your children have accumulated wealth on their own, or if you have a family business you want to keep in the family, you should consider a generation-skipping transfer tax trust. This kind of specialized trust assures those assets are preserved for your grandchildren and future descendants, thereby creating a legacy for future generations.

Smart Business spoke to Maynard at length.

What are the key questions to ask yourself, if you’re considering a generation-skipping transfer tax trust?
One: Do you want your assets to grow and pass through the generations without incurring a federal estate tax in every generation?

Two: Do you want to protect those assets? The trust provides protection because the assets are not owned by the beneficiary but by the trust; and with a properly worded trust the assets cannot be reached in legal proceedings like divorce, lawsuits or creditors’ actions.

By law, how much are you allowed to transfer?
Each individual is allowed to make lifetime gifts up to $1 million without paying gift taxes — a total of $2 million for you and your spouse. Once the gift is made, the asset is no longer part of the grantors’ estate subject to estate taxes.

Cash and other assets like stocks, bonds and real estate — and their cash value — can grow through the years. If they’re in a generation-skipping trust, they pass from generation to generation. Although generation-skipping transfer tax trusts eliminate estate tax for the next generation, your children can only enjoy income and dividends from the assets. However, your grandchildren can actually enjoy more of the benefits. The trust can pay for education, travel, medical and health care expenses, housing and more.

How can the trust be written up?
You, as the grantor, can establish who will be the administrator or trustee of the trust: a banker, a brokerage firm, a financial institution, an estate manager, or even a member of the family or any combination could be appointed.

The trust itself might provide for distributions to your children, or it might exclude the children.

It might be set up to provide that all assets are distributed to your grandchildren as they reach certain ages, or it might continue to benefit more remote descendants.

You can set up provision where the beneficiary could become a co-trustee or administrator upon reaching a minimum age set by the trust, to help oversee the trust and have fiduciary responsibility.

By law, some states allow for the trust to exist in perpetuity while some allow 90 years.

What are some of the drawbacks?
The trust is irrevocable, and the beneficiaries will not enjoy outright ownership of assets. For instance, funds can be used to purchase a home, but the home must be held in the name of the trust.

[Also], if an asset is ever taken out of the trust, then it may be a taxable event for the trust and/or the recipient.

Who will write such a trust?
You would definitely need a competent estate-planning attorney who understands the complex Internal Revenue Code. The trust needs to be a part of a larger plan that would include wills, living trusts, power of attorneys and perhaps other types of trusts.

SHERRY MAYNARD is financial adviser, vice president and Charter Wealth Adviser at Hilliard Lyons in Dublin. Reach her at (614) 210-6284 or smaynard@hilliard.com.