Being taxed is not something anyone particularly relishes. But when you are taxed more than once on the same money it can be especially disconcerting. This is what we are looking at with the federal gift tax and the estate tax.
The possessions you have were accumulated with resources that you had left over after you paid income tax, self-employment or payroll tax, sales tax, property tax and any number of additional taxes. The same can be said of gifts. So a lot of people view the estate tax and the gift tax as instances of double taxation.
Getting taxed twice on the same resources is bad enough, but if you were to leave an inheritance to your children and they subsequently left the resources to their children, another round of taxation could be imposed.
One way to mitigate this steady asset erosion is by the creation of a generation-skipping trust. To a large degree the name explains the trust: You name your grandchildren as the beneficiaries rather than your children, “skipping” a generation.
However, your children can still benefit from assets that have been conveyed into the trust. They can receive distributions of income derived from the trust and they can use property that is owned by the trust. However, the assets in the trust are protected from claimants against the children.
Upon the death of the children the grandchildren assume ownership of the trust and in the end two generations enjoyed trust benefits while just this one instance of taxation was imposed. But what out for the generation-skipping transfer tax as you are doing this planning.
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