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Family inheritance situations can be a hot mess. Though parents may be interested in leaving equal portions of their estate to their children, sometimes parents may want to skip a generation, and leave a child's portion to their grandchildren. Perhaps one child has made a fortune, and they believe it would be a better tax advantage to give an estate portion directly to the grandchild to avoid the estate eventually being taxed twice. Maybe another child is a shopaholic, and they are concerned if they don't leave anything to the grandchildren, those kids will never inherit a dime in their lifetime.
For whatever reason, grandparents may want to leave property to their grandchildren, and there are a few topics to keep in mind when doing so.
Trusts are a great vehicle to transfer wealth to anyone, be it a grandchild, child, or friend. Many very wealthy people use trusts to avoid paying taxes, but trusts can be beneficial for everyone. First, trusts don't go through probate, which can take a number of years. Your beneficiaries will be able to reap the benefits of the trust you create as soon as you want, be it on the day that you die, or ten years later, if you so choose.
Which brings about the second benefit: you have more control over what happens with your money and property with a trust. You can put stipulations on it in ways not possible with a will by appointing a reliable trustee and leaving specific instructions. This is especially helpful when leaving wealth to grandchildren, who may not have yet learned the value of a hard-earned dollar. And finally, trusts are private, whereas wills go through probate courts. These courts must publish their records, as a matter of law. If you are a private person, you may very well want to avoid probate courts by putting everything in trusts.
If a grandparent's primary motivation for leaving property in trust to grandchildren is taxes, there are a few rules to keep in mind. Currently, the first $5.6 million of an individual's estate, or $11.2 million of a married couple's estate, are exempted from federal tax. Most things after that are federally taxed at 40%. If you're lucky enough to have such a massive estate, trusts can be a great way to avoid taxes, but generally to do so they must be irrevocable trusts. There are about ten states, depending on changing laws, you really don't want to die in, since they have a state inheritance tax, which is paid by the beneficiary. Sometimes it is as low as 1 percent, and other times as high as 20 percent. Each state also has an exempted base amount, similar to the estate tax.
There is a concept not generally discussed among the popular masses called the Generation Skipping Tax (GST), sometimes called the transfer tax, that applies to grandchildren's trusts. The federal government became wise to the fact that people were leaving money to their grandchildren in order to avoid paying estate tax twice - once when the property went to the first generation child, and again when the property went to the second generation grandchild. As such, the GST applies a second layer of tax to trusts that go from grandparent to grandchild.
However, in the 2018 Tax Cuts and Jobs Act (TCJA), the GST exemption was added as a second layer of exemption, and currently the GST exemption is the same amount at the estate exemption. Meaning each grandparent can now leave $11.2 million to each grandchild without paying any estate tax. However, after that $11.2 million per grandparent, a double tax kicks in - estate plus GST, and therefore it is incredibly wise not to transfer any amount higher than $11.2 million per grandparent that isn't in a irrevocable tax-avoiding trust. This high GST exemption is set to expire by 2025 unless there is a congressionally passed extension. But as of now, for large estates, there is a major tax exemption for leaving property to grandchildren.
Trusts, wills, and taxes are very complicated topics, but very lucrative ones too. Many loopholes exist, and many more change every year, that help estates avoid paying taxes. It may be a very wise investment to visit an estate attorney to discuss your estate, and how best to leave it to your descendants, and friends. The government already received their portion of your estate when you earned it. An estate attorney can keep the government from taxing that money yet again.