If you are a Michigander seeking ways in which to pass your estate down through your family, you may wish to consider establishing a generation-skipping trust. These trusts generally designate your grandchildren as beneficiaries, thereby bypassing your children and saving your estate the double estate taxes it would pay if your children first inherited followed later by your grandchildren.
Keep in mind, however, that you do not necessarily need to designate your grandchildren as beneficiaries of your generation-skipping trust. You can name anyone you want, as long as (s)he is at least 37-1/2 years younger than you and is not your spouse or former spouse.
In addition, your generation-skipping trust need not completely ignore your children. For instance, you can structure the trust so that your children receive the income produced by the trust’s assets throughout their respective lives even though they never actually own those assets. If you choose this type of generation-skipping trust, however, make sure you fund it with income-producing assets or ones that likely will substantially appreciate in value over time.
Both the estate tax exemption and the generation-skipping transfer tax exemption come into play with regard to your generation-skipping trust. Each exemption amounts to $5.49 million if you establish your trust as an individual and $11.2 million if you and your spouse establish it together as a married couple. The difference between each exemption has to do with the time when each becomes applicable.
You take the generation-skipping transfer tax exemption at the point where you pass your assets to your trust beneficiaries by means of the trust. Your estate takes the estate tax exemption at the point where the trust’s assets pass directly to your heirs. Both exemptions obviously save a substantial amount of taxes.
In addition to estate and gift tax benefits, your generation-skipping trust provides additional benefits as well. For example, if one of your adult children divorces, the trust assets remain out of the reach of his or her ex-spouse. Likewise, if (s)he encounters financial difficulties, his or her creditors cannot invade the trust assets to obtain debt repayment.