But, between the 1970s and 1980s, the Internal Revenue Service began closing loop-holes in the federal tax code. Now, federal statutes ensure that generation-skipping transfers are taxed, too.
Using a Trust as an Alternative
A generation-skipping trust can provide an ideal solution to federally imposed taxes. And, while California does not have a state-imposed estate tax, you may need a trust if you hold assets in any states that do.
A generation-skipping trust lets you transfer assets—such as a home, business, or stocks—into the control of an irrevocable trust. Once the trust has these assets, they will no longer be considered part of your taxable estate.
Such trusts allow you to name anyone at least 37.5 years younger than you as a beneficiary, including your grandchildren and other family members.
However, your own children can benefit from the trust, too. If the trust is generating returns or income, your children may be named as beneficiaries. Once they pass away, the trust will exist for the exclusive benefit of your grandchildren or other named heirs.
While generation-skipping trusts are still subject to federal tax, the fact that their benefits are only fully disbursed to your “generation-skipped” beneficiaries means that taxes are only levied once.
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