If you ask the average American citizen how he or she feels about paying taxes most will tell you that that they don’t mind carrying their share of the burden. There are certain essential services that we all partake in, and everyone utilizes the infrastructure and it has to be maintained.
However, when you lay out money for any reason you want to feel as though you are not being taken advantage of or treated unfairly, and this is why many people have a lot of difficulty embracing the estate tax.
To provide a very basic example, suppose you started saving a particular percentage of your earnings at a very young age and kept it up through retirement. To keep it simple for the purposes of this example let’s say you placed this money in a savings account every two weeks when you got paid for 50 years.
After paying income tax and payroll tax on your earnings you may have been left holding sixty cents or so of every dollar that you were actually paid. But you still dutifully built up your savings over five decades out of this remainder, and over that time this nest egg grew into a pretty tidy sum.
When you pass away and leave this hard earned money to your children, it is subject to the estate tax, which sits at 35% at this juncture. Should your children hang on to it and pass it along to their children, it will be taxed yet again. If your grandchildren never use it and bequeath it to your great-grandchildren, it will be subject to the estate tax for a third time, and so on.
As a response to this cycle of asset erosion some taxpayers choose to create what is called a legacy trust. With these vehicles you name your grandchildren as the beneficiaries instead of your children, but your children can still gain benefits from the trust, receiving cash distributions and utilizing property placed into the trust. When they pass away, the assets in the trust are inherited by your grandchildren and the estate tax was applicable just once though the resources passed through two generations.