When people try to make the case that the estate tax should be permanently repealed one major prong of their argument is the fact that it is an exercise in taxing monies that have already been taxed. When you look at it objectively, any assets that you have been able to accumulate were acquired with the money that you had left over after paying income and payroll tax. And in addition to this you paid all kinds of additional taxes at every turn throughout your life, from property tax to sales tax to capital gains tax and countless others that fly under the radar, like gasoline tax. So how is it fair to tax this remainder yet again upon your death, and at a rate of anywhere from 35%-55% no less?
If that wasn’t bad enough, if you think the matter all the way through, your estate may be subject multiple instances of “death taxation” as well. Let’s say you leave assets to your children and they never spend the funds. When they pass away, a large percentage of the taxable portion will be swallowed up once again when they leave the money to your grandchildren. This erosion can continue beyond that generation as well.
One way to respond is through the creation of a generation skipping trust. With these instruments you name your grandchildren as the beneficiaries rather than your children. Since they don’t own the assets claimants against your children can’t target the trust. But the children can benefit from the trust, using trust property, receiving income and even directing its disposition through a special power of appointment.
When the children pass away your grandchildren assume ownership of the trust and the generation skipping transfer tax is applicable, but this is the only tax exposure though the assets were used by two generations.