There seem to be two primary reasons that middle-class Americans neglect considering generation-skipping planning. One is the sense that the concept applies not to them, but only to very wealthy families like the Rockefellers, Morgans, and Gates. The other is a failure to embrace a time dimensional component to their thinking (which results in “getting stuck in the status quo”).
What do we mean by the time dimensional component? Most of us approach financial and estate planning unscientifically, with characteristic likes, dislikes, fears, and desires. Our decisions are based on what makes us comfortable at any given present moment. Unfortunately, our advisors (attorneys, accountants, brokers) often pander to our wants, allowing us to be satisfied with the illusion that our comfort with a financial strategy (or non-strategy) is the final valid criteria deciding for adoption. But, obviously and logically, the “comfortableness” of a financial strategy does not make it superior to other alternatives.
Good financial planning should not start with what is comfortable for us, but with an enumeration of our own desired outcomes and with an assessment of specific action that will likely help us achieve those outcomes.
Comfort is not a reliable criterion for electing a specific action for a simple reason. Frequently the most comfortable action is stasis (or inaction). Stasis requires almost no energy, time, or planning. Alas, comfort and stasis are largely interchangeable terms.
Stasis, of course, leads by default to a non-analyzed, rarely questioned, and thus ineffective strategy, unconnected to a consciously analyzed and sought-for projected outcome. It is logical to assume that stasis frequently leads to less than an optimum outcome. Optimum outcomes require at least a little effort! A simple analogy has to do with restaurants. A gourmet supper at an affordable cost at the best restaurant in your town on a Saturday evening is going to at least require a reservation or an extended wait in line.
While all this seems obvious, comfort is the understandable choice when good estate planning means considering one’s demise. The cure is to focus on the desirability of a wonderful future outcome (even beyond one’s own lifetime) rather than our own simple death. By focusing one’s wisdom on desirable outcomes for our survivors, one begins to feel empowered to create and maintain an estate plan. This really means bringing a time dimension to our planning. When we consider creating a desired future, we become more aware of the need to modify something in the present.
If you can’t beat death, you can at least control some of the financial consequences!
The benefits of generation-skipping trust planning should be assessed with a time-dimensional component in your thinking. The actual benefits are derived in the future and they are basically for your offspring and loved ones. The immediate benefit for you is the knowledge that you are creating a higher level of security for your children and grandchildren. For example, the tax benefits that you realize will go to them (albeit you will not give up more than the smallest fraction of the benefits they derive).
The mathematics are irrefutable. If you manage to leave a million dollars in assets directly to your children at your death, these monies will eventually be taxable in their estate. (Keep in mind that the newest tax law fully reinstitutes the estate tax in 2011. We must all assume that our children will make it until then.) Assuming that the million dollars in assets grows at 6%. It will double every 12 years. Any assets which your children purchase with this money, such as real estate, may also gain in value due to inflation.
If your child is 40 at your death, one million dollars growing at 6% interest will be worth two million at their age 52, four million at age 64, eight million at age 76, and sixteen million at age 88. Under current law, the one Bush just passed, your child’s estate tax may touch eight million dollars. Simply put, your grandchildren could have avoided this tax and received eight million more dollars as a consequence of generation-skipping planning. But you have time to plan things a little differently (having read this article).
Have you disinherited your child with this plan? Hardly. If a child needs a distribution from the trust, the funds are available. If the child wishes to purchase a house, the trust could buy it for him to live in. (warning: divorce lawyers and potential creditors don’t much like this concept!).
This brings us to our other point. There is a widely held perception that generation-skipping trusts planning is something reserved for the Rockefellers and Morgans. The truth is that taxes on generation-skipping transfers for the super-wealthy are confiscatory. For example, if a very rich person left ten million dollars to a generation-skipping trust, about five million would go to estate taxes, and another few million would go to generation-skipping taxes. There might be less than three million left.
On the other hand, if you had left just a one million dollar estate to a generation-skipping trust, there would be no federal estate or generation-skipping tax. Clearly, the advantage of this idea falls to the average successful American family and not the super-wealthy.
Why? In years’ past closing of generation-skipping loopholes, to deter the Morgan’s and Rockefellers, Uncle Sam left a concession for the not-so-wealthy. Every American has been granted a one million dollar generation-skipping tax exemption. Few people know about it. Fewer still use it. And to those who know about it and wish to use it, they must plan carefully to get all the benefits that they are entitled to.