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Bull, Morreale & Judelson, P.C.
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Generation Skipping Trusts
What is a Generation Skipping Trust ("GST")? A generation skipping trust ("GST") is a trust that can extend during the lifetime of the first beneficiary and continue for other beneficiaries or be terminated at that time. There are estate tax and asset protection advantages created by using a GST. For purposes of this presentation the first beneficiary will be referred to as the "child" and the person creating the GST will be referred to as the parent. What are the estate tax advantages of a GST? The assets in the GST will be available for the benefit of the child and then "skip" to the next generation without the payment of any estate tax at the time of the child's death. A GST may be appropriate from a tax perspective when a child's personal assets are very substantial and the child may receive a significant inheritance from the child's parents. How long can the assets continue to be held in a GST? The assets can continue to be held in trust for as long as the rule against perpetuities, or even longer when the trust is created in a state that does not have a rule against perpetuities. What are the non-tax advantages of a GST? The non-tax advantages of a GST include:: (i) asset protection purposes if the child is in a situation, marital or professional, where the assets may be subject to creditor claims and/or (ii) asset management purposes when the child lacks the ability to manage funds. Does the GST result in any impact on the parent's estate tax? No. The estate tax exposure at the time of the parent's death is not affected by whether or not it is decided to utilize a GST. To what extent can the assets be available for the child? The standard for the availability and use of the trust funds for the benefit and enjoyment of a child can be extremely broad. The standard can include not only "support and maintenance", but also "comforts, conveniences, pleasures and happiness." The discretionary powers cannot be exercised by the child and can only be exercised by a Disinterested Trustee. Who can be the initial trustees of the GST trust? The child can be designated as a trustee of the GST. A child can request his or her parent to designate a certain person or persons as the initial co-trustee or co-trustees, i.e., Disinterested Trustee, of your own trust. Can the child remove and substitute the Disinterested Trustee? The child can be given the right to remove the initially designated trustee and substitute another person as the Disinterested Trustee. The only limitation on the right to remove the trustee and appoint a successor Disinterested Trustee is that a related or subordinated person as defined under the Internal Revenue Code can not be named as a Disinterested Trustee. Can the GST be terminated before the scheduled termination date? The GST can be terminated by the Disinterested Trustee and the trust assets distributed if the continuation of the trust is no longer appropriate. Can the child change the ultimate beneficiary of the GST? The child can be given flexibility to determine the beneficiaries after the death of the child. This is accomplished by giving the child a limited power of appointment. This power of appointment does not require the approval or consent of any other trustees. What is the maximum amount that can be exempted from the GST Tax? During 2008, the maximum amount that can pass to a GST from any person is $2,000,000. This means that for a married couple, a total of $4,000,000 could be placed in a GST. The exemption amount is scheduled to increase in 2009 to $3,500,000. See Schedule [S-1]. Disadvantages of creation of GST? Although the creation of a GST can provide substantial estate tax reduction benefits and asset protection advantages, there are the inconveniences of involving another person in your personal affairs and the trust will be required to file an income tax return each year. Can a parent decide to create GST's for only certain children? A GST can be created for some children and the other children can receive their gift outright. The estate plan can be tailored to implement your individual needs and the desires for each of your children. What if the estate tax is repealed? With the scheduled increases in the federal exemption equivalent and the one year repeal of the estate tax law in 2010, there may be a feeling that it is not necessary to protect your children from the estate tax exposure at the time of your death. However, it should be noted that if the estate tax is not repealed, or if the estate tax is repealed and then reinstated, it is probable that any GSTs that are in existence when the estate tax would be reinstated would be grand-fathered and protected. In addition, the asset protection advantages of the GST will continue to benefit the child. |
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