The estate tax is scheduled to come back with a top rate of 55% in 2011, and over the years this rate has fluctuated but it is generally somewhere in the vicinity of 50%. Many people question the fairness of a tax that sucks up half of the wealth that you have accumulated throughout your lifetime, especially considering the fact that you paid plenty of other taxes along the way. Because this tax is so devastating to the value of your assets, estate planning attorneys recommend strategies that can help you avoid the estate tax, and one of these involves the creation of a generation-skipping trust.
With these trusts you name your grandchildren as the beneficiaries, skipping a generation, as it were. The assets that have been placed in the trust are not subject to estate tax, but they are subject to the generation-skipping transfer tax. However, there is an exemption that should be in the vicinity of $1.4 million in 2011, so you can avoid this tax as well if the value of the trust does not exceed this exclusion amount.
Though they are not the named beneficiaries, your children can benefit from the trust. They can receive cash distributions, live for free in a home that has been placed in the trust, and in fact, they can even control disposition of assets to parties other than themselves through a special power of appointment. They can enjoy this access and control, but creditors, former spouses, and other potential claimants cannot target assets that have been placed in the trust.
To maximize the long term utility of generation-skipping trusts, your children can create one of these as well, naming their grandchildren as the beneficiaries. By employing this strategy generation after generation your family can avoid the estate tax and keep the wealth that has been built over the years intact and in the family.