Generation-skipping trusts may appeal to older individuals or couples in Arizona with large estates. If you have substantial sums to transfer to future generations, a trust that gives to your grandchildren or other qualifying beneficiaries instead of your children can reduce or eliminate federal estate taxes.
Federal Estate Tax Exemptions
Currently, federal law allows an individual to give up to $12.92 million within a generation-skipping trust before estate taxes become due. A married couple may place double the individual number in a trust and still be exempt from the estate tax. Any amount above the exemption threshold becomes taxable at 40% with the generation-skipping transfer tax.
As the holder of a large estate, you want your financial legacy to support future generations and continue to grow. A trust strategy that limits taxation keeps large sums under your family’s control.
However, the decision to place millions of dollars in a trust must only be made after careful analysis of tax and estate law. A generation-skipping trust is irrevocable. You cannot change your mind and remove the funds ever.
Who Can Be Beneficiaries of a Generation-Skipping Trust?
Although most people choose their descendants as their beneficiaries, the law does not require blood relationships. The most important part of setting up a generation-skipping trust is to select a beneficiary who is at least 37.5 years younger than yourself and is not your spouse or ex-spouse. This could be your grandchildren, nieces or nephews or anyone meeting the age and nonmarital criteria.
Establishing a generation-skipping trust involves executing multiple legal documents. These documents should clearly outline how money is to be distributed and when.