IMPORTANCE OF GST TAX PLANNING
The generation-skipping transfer tax is imposed on transfers, whether out-right or in trust, to a transferee who is at least two generations below the transferor's generation. The tax is a flat rate equal to the maximum unified transfer tax rate at the time of the transfer, subject to the allocation of up to $2,000,000 of GST exemption available for each transferor. In this manner the federal government allows some wealth to avoid taxation in your children’s estates. While the assets are still taxable to your children, they will not be taxed again following your children’s death.
Significant accumulation of intergenerational family wealth can be achieved on a long-term basis if the planning opportunities under the GST tax system are maximized. The $2,000,000 exemption provides significant tax exemption in skipping a generation. The exemption can also be leveraged by using it for lifetime gifts and by funding the trust transfer with appreciating property. The total exemption amount can be further enhanced with careful coordination of gift splitting with a spouse.
¨ Consider codicils to your wills providing for Generation Skipping Transfer Tax trusts in order to preserve the GST exemption amount and prevent its taxation in your heir’s estates.
ANNUAL GIFT EXCLUSION
As your estate continues to increase in value, you may wish to take advantage of the annual gift exclusion to reduce your estate while endowing your children or grandchildren. One may make as many gifts to different individuals as desired, each tax-exempt up to $12,000, the prescribed limit under the annual gift exclusion. A couple can gift a total of $23,000 per donee each year without incurring gift tax by agreeing to “gift splitting”. However, this triggers the necessity of filing a gift-tax return, even though no tax is due. Amounts in excess of this limit will require the use of a portion of your lifetime exemption (currently at $2,000,000). Any part of the unified credit used for gift taxes reduces the credit for estate taxes.
¨ Begin a program of lifetime gifting to your children and grandchildren in order to reduce your estate while endowing your heirs prior to your deaths.
In addition to the annual gift exclusion, there is an unlimited deduction for medical expenses and tuition costs paid for an individual donee. To qualify, the tuition must be paid to a qualified organization for training the student, and medical expenses must be qualifying unreimbursable medical care expenses.
CHARITABLE REMAINDER UNITRUST
The Charitable Remainder Unitrust offers several tax advantages. It is a trust that allows an individual to make a gift to charity or charities, avoid capital gains taxes and retain an enhanced current income for life. The trust can be established to run for the joint lifetime of a husband and wife. The income is based on a fixed percentage of the net fair market value of the assets, determined annually, but not less than 5%. A Charitable Remainder Unitrust is particularly advantageous to individuals owning highly appreciated property that produces a low-income yield.
When a trust is established with a charitable remainder, an individual is entitled to an income tax deduction for the present value of the remainder interest given to charity. If appreciated property is used to fund the trust, no capital gains tax would be payable upon subsequent sale and reinvestment of the proceeds.
Utilizing the Charitable Remainder Unitrust has a threefold tax advantage:
1. It eliminates capital gains tax on the sale of the property.
2. A deduction for the charitable gift is allowed on the donor’s tax return with a potential five-year carry forward.
3. No estate taxes would be paid on that portion of the estate used to fund the trust, since the remainder ultimately goes to charity after both deaths.
4. Increases current income for the donors.
Compared to the appropriate non-charitable alternatives, charitable remainder trusts and charitable lead trusts always decrease the after-tax amount ultimately passing to your descendants. Only persons with actual charitable intent – i.e. those willing to reduce the amount their family receives in order to give to charity – should create charitable remainder trusts.
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