Generation Skipping Trusts: opinions?

Depends on the size of the estate. If it's under the GST exemption amount ($1,000,000 last time I had occasion to look), there's little or no reason to do that unless the kids have a lot more money than the parents. If the estate is larger, there is more reason for using a GST. Stu

"Stuart A. Bronstein" wrote:

But who knows what the exemption amount, if any, will be at the time of death? And who knows what the financial status of the beneficiaries of the current living trust (i.e. the "skipped generation") will be at the time of __their__ deaths? That is one of my problems with a GST: we are making a decision now (to write the creation of GSTs into the current living trust) based on ass-u-me-tions about conditions, ergo tax benefits, long after the time of death. Another concern is the restrictions on the use of the funds in the GST by the beneficiaries of the current living trust (i.e. the presumptive trustees of the GSTs). My mother has no intention of limiting how her immediate beneficiaries (me, for example) use the funds they inherit. The __only__ intended purpose of GSTs would be the potential tax benefits. Some of the restrictions are de jure (the IRS limitation, viz. for health, education, support and maintenance in accustomed manner of living). When I asked my mother's attorney, he scoffed at the concern ("who is going to enforce it?"). But when I asked about specific hypothetical uses -- e.g. to buy a Maserati or a palatial second home in Maui? -- he said: well, maybe not that. What about using the funds to start a business? He said "sure!". Hmm, that does not sound like "support or maintenance" to me. (Who would enforce it? Well, the beneficiaries of the GSTs, if no one else. We hear about such lawsuits all the time among "the rich and famous".) Some of the restrictions are de facto. If I choose to distribute "my" estate (including the GST funds for this accounting) disproportionately, I cannot easily apply that proportion to the funds covered by the GST. (Although I might get lucky and the GST funds are less than the proportion of "my" estate that I would to give to the GST's beneficiary anyway.) Another thought: I believe that the funds in a GST for which I am the trustee (i.e. I am the "skipped generation") are not considered mine. That is a good thing for the purpose of sheltering those funds from liability claims. But it might be detrimental if I were to apply for a loan, for example. Again, it is not my mother's intention to set aside some of her inheritance for the "second" generation (i.e. the beneficiaries of any GSTs). My mother's estate planning lawyer says a GST is a "no-brainer". But aren't those valid considerations? Did I overlook any other potential concerns about GSTs? PS: I am not saying that any of those concerns trump the benefits of a GST. I am simply saying that they seem to be issues to weigh against the benefit. That is, a GST is __not__ a "no-brainer" in my mind.

Well it agaoin comes down to the size of the estate and the size of the funds going to you. If the funds are large enough where you will be getting plenty of $ then legacy planning is always a good idea when there is extra cash.

You're right about that, and one reason I've seldom used a GST - unless there's a lot of money involved and it can be made to work whatever the likely future is, it may not be worth the trouble. I believe that the effects of a GST can actually be achieved along with the flexibility to deal with the future. But I'm not fully versed on all the nuances of them at the moment, so I couldn't give you details.

I believe if there is an independent trustee that isn't a problem.

That's not a good reaction from a lawyer. It's roughly equivalent to saying, "go ahead and rob the bank - it's not illegal unless you get caught."

If qualifying for a loan might be a concern, in my judgmnet there's not enough money at stake to go to the trouble of a GST. It doesn't save anything in your mother's estate, only in yours.

The benefit of a GST is that a limited amount of money taxed in your mother's estate won't be taxed again in yours. That's it. If you don't think there will be enough in your estate for estate tax to be a big problem when you die, I don't think you need to bother. Stu

Well, that's the imimediate advantage but there are others. While in trust the funds are protected from bankruptcy, divorse and beneficiary incompetence. The capital grows, untaxed for FET, through several generations. A trust can be worded to *almost* mimic direct ownership in that it can loan money to beneficiaries, buy property for them, guarantee loans, etc. If you want a GST get a different lawyer that is Board Certified in Estate Planning, or the equivilent in your State. Do not try to add wording onto an existing trust. You can only pass $1 million per donor free of GSTax so the size of the estate doesn't matter. The other $XX million can have the same provision but must give successive beneficiaries at least a power to appoint to their creditors or our other descendents in order to keep that excess portion IN their estates and hence free of any GSTax. So, as a possible example our GST, after we both die, splits into shares, one for each of our childrens' families with that child the trustee of his family's trust but, a majority of ALL beneficiaries of all trusts can elect a co-trustee (or sole trustee if there is no other trustee) or fire the trustee for any trust. All trustees must be a decendent of ours unless it is a corporate trustee. No beneficiary can appoint their interest to a non-descendent of ours. The net effect is to keep the money in our family and controlled by our family . Each family can do virtually whatever they want with the money from squandering it on themselves to preserving capital to produce income for their heirs. So, from that standpoint, it's no different then just giving them the cash except for the tax and protection advantages. ed

Ok, yes they can be drafted that way.

Well, the income would also be free of FET if it's sitting in the beneficiary's bank account.

As long as the trustee cooperates. In some cases that's a pretty big "if."

The amount is technically the same as the lifetime exemption amount for estate tax, but that will go back to $1,000,000 for anyone dying in or after 2010. Stu

Thanks for clarifying that point. That is the way I understood it, but I confess that I am not paying attention to the details at this point. I'm a "pilot" when it comes to new concepts. First I fly at the 30,000 level to get a broad view of landscape. Then I swoop down to tree-top level to look at the details. At this point, I am still at the 30,000 level, but I am "starting my descent" ;-). With respect to liability protection (bankruptcy, lawsuits, etc), my understanding is that it protects those assets from liability claims against __me__ (the "skipped" generation). But does it protect those assets from liability claims against the beneficiary while the GST is in effect (i.e. while I am still alive)?

That's generally correct.

If drafted properly and depending on the laws of the individual state, in general I think it would, until the trust is finally terminated. At that point the property will be distributed out of the trust, and will then become available to the beneficiaries' creditors. Stu

There's 2 considerations here. 1. You presume you are the only skipped generation and your children the final beneficiaries and will get the money when you die, or when they reach 35 or 40 or some other arbitrary age. 2. Better yet, make them ALL skipped generations, you, your children, your grandchildren, great grandchildren. etc. etc. It's called a Dynasty Trust. All beneficiaries are protected from Liability, divorce, bankrupt etc as long as the money is left in the trust and they don't have a general power of direction over it (except limited powers). You can draw the trut instrument as controlling, or as free, as you want. Remember, it's instead of giving the cash outright because you want to provide the inherent protection of trust funds as well as to avoid Estate Taxes, whatever they are, for as long as possible. Consider what your children are going to do with the funds? Probably reinvest them and create another trust to skip their next generation. Why not make one trust to serve ALL your generations of heirs? ed

But don't forget the rule against perpetuities. The trust must terminate at some point and the property distributed to the heirs at that point. The amount of time is not specific in terms of numbers, but is calculated by adding 21 years to the date of death of the last person to die out of a specified group. Stu

Moderator: 21 years bewteen deaths. I can live with that.

Some states, Alaska comes to mind, allow trusts to continue for an unlimited amount of time. Just do an Internet search on "dynasty trust" for more information. One of the first hits I got said there are 13 states that now allow them. One does not have to be a resident of these states to establish a dynasty trust.

-- Drew Edmundson, CPA Cary, NC

I did a google search on dynasty trusts. The first three links didn't work - there was nothing there. The fourth link was to a page of information that was by someone who had no clue what he was talking about. I also checked the Alaska law on the subject. They appear to still follow the rule against perpetutities. The difference is that normally the rule works prospectively. That is to say that you need to be able to determine who will be the beneficiaries and when the trust will terminate, at the time it is created. In Alaska, and several other states, the rule works retroactively. That is to say that they take a wait and see approach. The rule does not void trusts based on information had when they are created, but later on as time goes by. But the trusts still must terminate within the time specified by the rule. Stu

The Mesa Royalty trust includes this in its charter, as shown in sec.edgar-online.com/2005/08/09/0001104659-05-037834/Section2.asp and other places: =====================The Trust may also be terminated at the expiration of twenty-one years after the death of the last to die of all of the descendants living at the date of execution of this Trust Agreement of Joseph P. Kennedy, late father of the late President of the United States, John F. Kennedy. ===================== That should be good for well over a hundred years.

That is not my understanding. Hopefully our esteemed moderator will allow this link through (it is to dook university):

Note on page 4 of the PDF the line: "On April 2, 1997, Alaska effectively eliminated its Rule Against Perpetuities with regard to beneficial interests held in trust, but only where all or part of the income or principal of the trust could be distributed at the trustee's discretion to a person who was living when the trust was created." Perhaps the author is incorrect or perhaps we are disagreeing on semantics (he does say "effectively"). I am not an attorney, I was just relaying the information I have been told and read from those who are attorneys.

-- Drew Edmundson, CPA Cary, NC

Very interesting. I went to look at the Alaska statutes - they did indeed abolish the common law rule against perpetuities. They created something like it, but it could well allow the trust to law 1000 years rather than 100. It's all pretty complicated, and I didn't take the time to become an expert. The reason for generation skipping trusts in the first place was to avoid the wealthy setting up these kinds of trusts. But I suppose the exemption is large enough that it could still make sense to set up an Alaskan trust under some circumstances. Stu