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Generation Skipping Tax

In addition to estate and gift taxation, Congress saw fit to add a further layer to the transfer tax system that places a flat 35% tax on “generation skipping” transfers in excess of the Generation-Skipping Transfer (GST) Tax Exemption, which is currently $5,250,000 (for 2103). The tax is very technical, complicated and widely misunderstood and misapplied. In general, the tax is of limited concern for couples whose combined estates does not exceed the exemption amount. Briefly, a generation-skipping transfer is a transfer to a family member two or more generations below the transferor (e.g. a grandchild) or a transfer to a non-family member that is more than 37 ½ years younger than the transferor.

For those who have large estates or whose children have large estates, generation-skipping transfers present an opportunity to defer, reduce or eliminate the total family estate tax burden. To accomplish this objective, careful estate planning with trusts is an absolute necessity. If you pass more than the exempt amount (whether you intended to or not) to skip persons, the 35% rate will be applied on top the federal and state estate tax rates. Needless to say, you want to avoid this possibility, and you can with proper planning.

The GST tax presents traps, but it also presents planning opportunities.  Dynasty trusts can be created, which if properly created, may create a fund to benefit descendants for generations to come without being subject to estate tax upon the death of each generation.  Illinois law now even allows these trusts to be set up as perpetual trusts.  Such trusts not only escape estate taxation at each level, but can also be used for asset protection planning for multiple generations of descendants.

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