Happy Sunday!

This week we had three or four people ask about the generation skipping tax, which sparked a discussion in the office, which gave me a great idea for this week’s newsletter.

So prepare to become generation skipping tax experts. Here we go!

First, the generation skipping tax was created because, you guessed it, super rich people were skipping generations when distributing inheritances to save money on future estate taxes.

See, if I have a lot of money and kids and grandkids, I can give some to my kids and the bulk to my grandkids to avoid estate taxes (really defer if you want to be technical).

The money I give to my kids is going to face estate taxes when they die, but the money I give to my grandkids won’t face estate taxes until they die – which is usually a lot longer.

The government saw this happening and wanted to put a stop to it – enter the generation skipping tax.

Basically what they said was (and these are the feds – this doesn’t apply to WA state) “you have $15m to give to anyone you want – including grandkids – before you pay estate taxes, but if you go over that and give to grandkids, that money is going to get taxed TWICE right away.”

They really don’t like it when you skip a generation.

The way the IRS monitors this is by making people elect to use the generation skipping tax exemption.

This is where all the questions come from. You google around looking for information on trusts and taxes and they tell you to watch out and make sure you elect your generation skipping exemption or you’re going to face heavy taxes.

They are kind of right, but not really.

Because there’s a wrinkle I forgot to mention…

When people originally heard of this generation skipping tax they thought they’d just park the money in an irrevocable trust to pass down from generation to generation and avoid all these taxes, but the IRS derailed that plan.

The rules require you to pay estate taxes, if owed, at the death of each generation, even if the assets are in an irrevocable trust IF no generation skipping exemption is elected.

So people are often worried about this tax when creating a trust that will last for multiple generations because, for example, what if someone forgets to use the exemption and then huge taxes are imposed?

Well, the IRS did you a solid here.

If you have a trust that holds assets for one generation and then passes any assets remaining in the trust to the next generation, the IRS implies that the exemption was elected.

Translation = basically all of the trusts we create for you have the exemption implied, so you don’t have to worry.

Make sense?

Good, because this email is getting a little long. :)

Have a great week!

Sincerely,

Christopher Small
Owner
CMS Law Firm LLC

PS – we love referrals. If you know someone that could use our help, let them know about us!