My accountant told me not to leave money to my grandchildren because the transfer tax would be too high. Was he correct?
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UPDATED: Dec 16, 2019
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Whether you should leave money to your grandchildren because the transfer tax would be too high depends on the size of your estate. The generation skipping transfer tax (GSTT) applies, on top of the federal estate tax, to certain amounts of money left to third-generation beneficiaries. So, depending on the value of the transfer, the transfer tax might apply to money you leave to your grandchildren, to nieces and nephews, and so on. That transfer tax exemption amount is $5.45 million for 2016.
If you do wish to leave more than $5.45 million to your grandchildren, then there are some ways to do it to attempt to avoiding the generation skipping transfer tax. The primary way that attorneys do this is through a special trust known as a Crummey Trust. Crummey Trusts give you the freedom to leave money to your grandchildren through making the funds a present gift. This means that the child can take the money out of the trust while you are still alive. However, there are some ways around this as well.
Ways to Avoid Transfer Tax: The Crummey Trust
Under IRS rules section 2503 (c), there are two rules in order for a Crummey Trust to be valid. First, the trust must be established for the care of a child who is under 18 years of age. This could be your grandchildren or even great grandchildren. Next, the child must be given access to the trust funds annually. The way that this is typically drafted is that the child can withdraw any amount, less the corpus of the trust annually on a specified day. Typically parents will assist in making certain that only an agreed upon amount is removed from the trust.
Crummey Trusts are a means around the generation skipping transfer tax, however the phrasing must be concise and bulletproof to pass the IRS’s requirements. Furthermore, the family must be educated on the importance of how the trust works. Otherwise, the trust will fail and the generation skipping transfer tax will apply.
What Happens if the Generation Skipping Transfer Tax Applies
When the generation skipping transfer tax does apply, you will have to pay the highest tax the federal government assesses, so you don’t want it applied to your bequest, to your grandchildren or other third-generation heirs. The generation skipping transfer tax is very complicated, and it is not something anyone but an estate tax expert should try and figure out for him or herself. If you want to leave money to your grandchildren without also leaving the burden of a hefty transfer tax, consult a qualified estate tax attorney for advice and guidance in drafting the appropriate documents.