When you run a business, you can amass a significant number of assets over your lifetime. However, these assets could potentially be a hindrance to your family after your death. They may have to pay federal taxes because of the size of their estate. As you put together your estate plan, you also need to consider how the generation-skipping transfer tax could impact your family.
According to Kiplinger magazine, you have to be strategic about the way that you pass assets to your family members. The generation-skipping transfer tax comes into effect any time you give an inheritance to certain people.
Who is subject to this tax?
Your family members have to pay this tax only if they fall into a certain category. You might leave assets to your spouse, your children, and your siblings. Depending on the amount you give them, they could have to pay a gift tax. However, they would not be responsible for a generation-skipping tax. This particular tax burden affects your grandchildren. You could, for example, put money into a trust for them to serve as their college fund. They would need to pay the generation-skipping transfer tax every time they receive money from the trust.
Can you avoid this tax?
There are a few ways that you can relieve your beneficiaries from this tax burden. You could establish several different trusts and carefully choose what goes into each one. This would allow you to group assets subject to the generation-skipping trust in one trust. You could then set the distributions at an amount that will not trigger the transfer tax. If you want to take this step, you have to put together a gift tax return for each year that you put money in the trust.
With careful planning, you can make sure that your family receives their inheritance without shouldering an undue tax burden.