The generation-skipping tax may affect California families with substantial wealth who want to transfer assets directly to grandchildren or other beneficiaries who are at least 37.5 years younger, but proper trust planning can help minimize this tax burden.
Understanding the Generation-Skipping Tax
Between the 1970s and 1980s, the Internal Revenue Service began closing loopholes in the federal tax code, and now federal statutes ensure that generation-skipping transfers are subject to taxation.
This tax was implemented to prevent wealthy families from avoiding estate taxes by skipping their children and leaving assets directly to grandchildren.
Using Generation-Skipping Trusts as a Solution
A generation-skipping trust can provide an ideal solution to federally imposed taxes. While California doesn't have a state-imposed estate tax, you may need a trust if you hold assets in states that do.
Benefits of generation-skipping trusts include:
- Tax efficiency - Assets are only taxed once rather than at each generation
- Asset protection from creditors and divorce proceedings
- Flexibility for multiple generations of beneficiaries
- Professional management of complex assets
How Generation-Skipping Trusts Work
A generation-skipping trust allows you to transfer assets—such as a home, business, or stocks—into the control of an irrevocable trust. Once the trust holds these assets, they're no longer considered part of your taxable estate.
These trusts allow you to name anyone at least 37.5 years younger than you as a beneficiary, including grandchildren and other family members.
Your children can also benefit from the trust. If the trust generates returns or income, your children may be named as beneficiaries. Once they pass away, the trust continues for the exclusive benefit of your grandchildren or other named heirs.
Tax Implications and Benefits
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 levied only once, not at each generational transfer.
This type of estate tax planning requires careful coordination with other estate planning strategies. Our experienced California estate planning attorneys can help you determine if a generation-skipping trust fits your family's wealth transfer goals.
