Taxes are not something that anyone looks forward to paying, but the vast majority of Americans have a fair and cooperative attitude toward their tax responsibilities. For the most part, the only time people really balk is when they can’t wrap their heads around the logic supporting a particular tax. This is why so many people have a hard time accepting the estate tax.
To demonstrate the core problem with the estate tax conceptually, let’s present an example. John was counseled by his grandmother early in this life that “a penny saved is a penny earned,” and he took this advice to heart. He saved as much as he could throughout his life, year after year, until the day he retired at 70 years of age.
Since he was so thrifty it always kind of stung him to see that he was only paid 60% of what he actually earned after paying income and payroll taxes, but he figured he was paying his fair share and being a good citizen. As you might imagine, after 50 years of saving so diligently he accumulated a pretty fair chunk of change.
But when John died and left his savings to his children, the estate tax ate up 35% of its taxable value instantly though it took him decades of hard work to earn it. His children were just as thrifty, and when they passed that remainder of John’s saving on to their children it was taxed at 35% again, leaving less than half of what had originally been accumulated by John throughout his life.
To avoid this scenario you can create a generation skipping trust or GST. With these instruments you name your grandchildren as the beneficiaries rather than your children. Your children can receive distributions from the trust and benefit from the property placed in it, perhaps living in a house that is property of the trust.
However, they don’t own the assets so no estate tax is levied and these assets cannot be targeted by claimants against your children. When the children pass away, your grandchildren assume ownership of the assets and the estate tax is levied just once, though the resources were utilized through two generations of your family.