Tax Saving Techniques - Generation Skipping

Since the 1986 Tax Act, it has been possible to leave an amount of property ($1,500,000 per individual and $3,000,000 per married couple) in flexible lifetime trusts for children that will eventually pass on to their descendants free of estate taxes at the child’s death. The generation-skipping, tax-exempt trust usually provides that all or any part of the trust income and principal may be distributed to a child or the child’s descendants, as the Trustee considers advisable. The personal and tax benefits of such a trust are at least three fold:

1. The property in the trust would be protected from the child’s creditors, including an auto accident suit or bankruptcy.
2. In the event of marital difficulties or divorce, the trust principal would not be reachable by a spouse as part of a divorce proceeding.
3. The value of the trust at the time of your children’s deaths, which by then should be substantially more than $1.5 million, would pass on after them completely free of estate taxes at that time.

Nevertheless, the children would have access, through a trustee, to the income and principal of the trust as needed.   It would be possible to place $3,000,000 in these kinds of trusts for your children and take advantage of the generation skipping exemption in this fashion.