A lot of people complain about high taxes. Looking at what the government takes from your weekly paycheck can be frustrating. But, it could be worse. Even people who don’t complain about taxes (there are a few) and understand it takes money to run the government would complain if they understood that it is possible for the government to tax the same money over and over and over. And, it happens more than you think.
Here’s a scenario:
You and your spouse leave a very large amount of money to your daughter without a trust or in a poorly drafted trust (yikes!). The money is taxed when it is transferred to your daughter. Your daughter leaves money she inherited to your grandchildren without a trust. Guess what? You’ve got it; that money is taxed again!
It is upon learning this that a well-meaning grandparent suggests leaving the money to their grandchildren rather than the child to avoid one of those tax events. Not so fast! In that scenario the federal generation-skipping transfer tax could apply.
Here’s another scenario:
You and your spouse leave $10 million to your child. If her inheritance grew over time, it would be subject to the estate tax at her death. That could result in millions going to pay estate tax.
There is a solution that could be used to stop the government from double-dipping. It’s called a Dynasty Trust. Assets that you put in a dynasty trust, plus any interest earned over the years, are still subject to federal estate tax. But they will be taxed just once when you transfer them into the trust. The assets will not be taxed again even though several generations can benefit from them.
It’s important to note here that income taxes are still due on any income that is generated by the assets in the trust. Therefore, most people choose to put assets that do not earn money in the trust such as growth stocks that don’t pay dividends and life insurance policies.
Dynasty trusts are complex legal documents. They should be prepared by experienced estate planning lawyers in Chatham County who have experience with trust and tax planning strategies. If you are interested in talking with an attorney with this experience, call our office at (912) 352-3999 to set up a consultation.