Most people are more than willing to pay their fair share of taxes. But when you are asked to pay taxes on the same money multiple times you may not be so willing. This is why a lot of people are not in favor of the estate tax. The assets that are left over after you pass away were accumulated after you paid income tax and many other taxes all of your life. Why should the occasion of your death trigger a federal levy on the funds that you are leaving behind to your loved ones?
Paying the estate tax once is a big deal, especially when you consider the fact that the rate of the tax at present is 35%. As high as this sounds, it actually represents some measure of tax relief. The estate tax was repealed for 2010 but the rate was 45% in 2009. And, when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 sunsets at the end of next year the rate of the estate tax is scheduled to be raised to a somewhat mind boggling 55%.
The clincher is the fact that your family may be subjected to this harsh federal levy more than once. Let’s say you leave an inheritance to your children that is valued in excess of the exclusion amount ($5 million right now). If they didn’t use those resources and bequeath them to their own children, your grandchildren, the estate tax will be applicable once again, and this can continue generation after generation.
This is not acceptable to many people. One strategy to deal with this issue is a generation-skipping trust. With these trusts you name your grandchildren as the beneficiaries, “skipping” a generation. However, your children can benefit from the trust, receiving cash distributions from income, even principal, thereby benefitting from the trust property. When your children die those trust assets are not subject to estate or generation-skipping tax. Your grandchildren inherit the funds and when they die the generation-skipping transfer tax is levied. In the meantime, two generations will have benefited from the assets and just one round of taxation will have been levied, even then at a far distant time into the future.