Avoid Double Taxation With Legacy Trusts
Most people can accept the fact that taxes are going to be levied and they simply make out the check dutifully and put the unpleasant matter behind them. But how would it feel if that tax bill kept being presented over and over again? This is the spiral that the estate tax brings with it, and when you examine the matter it is actually more than a little disturbing.
Let’s explain by way of example. Suppose you placed a certain portion of your paycheck in a simple saving account every two weeks throughout your entire life. Each time you made a deposit it was coming out of the money that you had left after you paid income tax and payroll tax.
Depending on your bracket these taxes may have consumed perhaps 40% of your earnings (possibly more). So this money in your savings account all came out of this remainder that you had left after paying close to half of your wages in taxes.
Many would say that you paid your fair share of taxes at that point and maybe more than your fair share. But when you pass away and leave that money to your children here comes the tax man again imposing a 35% estate tax on the taxable portion of your estate.
Then when your children die and leave that money to their children it is once again subject to the estate tax, and this pattern can continue on and on down the line. In the end, all of your original taxable assets can wind up in the coffers of the IRS.
One response to this asset eroding spiral of incessant and repeated taxation is the creation of a legacy trust, which is also called a generation skipping trust. With these instruments you fund the trust, appoint a trustee, and name your grandchildren as the beneficiaries instead of your children.
Your children can, however, benefit from the trust resources, receiving cash distributions throughout their lives, living in property placed in the trust, etc. But no estate tax is due and the trust assets can’t be targeted by claimants or former spouses seeking redress from your children.
When your children pass away, the beneficiaries, who are their children and your grandchildren, assume ownership of the assets in the trust. The estate tax is due then and only then, so the assets were used through two generations but taxed just once.
