Fall 1996

Some say twins skip a generation. Well, money can too.

Let's say Mr. and Mrs. Fitch are about 65, and pretty wealthy. Let's say two of their three children are well off, too. As we have seen in previous Newsletters, the estate tax applies when wealth is transferred from one generation to the next. Thus, when Mr. and Mrs. Fitch pass on, the estate tax will likely apply to the extent their combined estate exceeds $1.2 million (if their Wills are properly drawn and administered). If their estate is about $3 million, the tax will be roughly $700,000. Each of their children, then, will inherit some $750,000 after the taxes are paid.

This inheritance is nice for each of the children, but it also presents a problem, at least for those who are already well-to-do. It gets added to their own estates, to be taxed again when they pass on. Can anything be done about this?

The answer is yes; the answer is "generation-skipping." Rather than leaving their entire estate to their children outright, Mr. and Mrs. Fitch could leave up to $2 million in a generation-skipping trust for them. The children could be beneficiaries of the trust during their lifetimes, perhaps getting all the income of the trust, and principal as needed for their health and support. When the children pass on, however, the trust would go to their children, without being subject to estate tax again. This could save more than half the value of the trust, when it goes on to Mr. and Mrs. Fitch's grandchildren.

This is just one form of generation-skipping; there are many others. If you'd like to discuss this or any other aspect of your estate planning, please call the attorney with whom you work, or any of the members of our Trusts & Estates Group. Thanks.