Life Estates and the Generation-Skipping Transfer Tax

When you make the decision to see an experienced estate planning attorney to make a comprehensive estate plan to safeguard your assets and provide for your heirs, it can be a confusing process filled with a lot of legal terminology that might be new for most people. One of the biggest considerations in estate planning, and often one of the most confusing parts of it, is the effect taxes will have on an estate. To help you make the most informed decisions about what route you choose in planning your estate, it is important to have a full understanding of the different types of taxes that may come into play. One of those is known as the generation-skipping transfer tax, and the following information may be helpful in understanding it.

Life Estates

To fully understand the generation-skipping transfer tax, you first need to understand what a life estate is. A life estate is a type of estate in which ownership of real property – basically, a home and the land which accompanies it – is passed to another person and ends upon that person’s death. At that time, it may revert back to the original owner or it could pass along to someone else depending on the conditions you choose to set. In New York, life estates can be an easy way to ensure real property passes smoothly upon death without the need for probate. Life estates are also exempt from the federal estate tax. Usually, creating a life estate is a simple process, as is the transfer of property upon an owner’s death.

Generation-Skipping Transfer Tax

The Journal of Accountancy dates the generation-skipping transfer tax back to 1976 when Congress created it to stop wealthier families from avoiding the federal estate tax by more or less creating a life estate lasting for many generations. Theoretically, by using appropriate language and ensuring proper protocol is followed for filing revised property deeds, a person would be able to create a life estate that transferred their real property to their heirs upon death – then, their heirs would be able to create a life estate for their own heirs, continuing to avoid the federal estate tax. However, as with all areas of tax law, much has changed since then.

Currently, estate taxes and related taxes only kick in when an estate is valued at a certain amount. For 2017, the exempted amount is $5.49 million. That means estates worth less than that amount are not subject to the federal estate or generation-skipping transfer tax. Marital gifts, or the transfer of assets and property to one’s spouse upon death, have an unlimited exemption. Thus, it usually isn’t until the estate makes its way to children and subsequent heirs that taxes are collected. The current generation-skipping transfer tax aims to prevent people from passing real property and other assets to grandchildren, or anyone more than 37-½ years younger than the person making the gift or bequest, in an effort to avoid federal estate tax.

There are still ways to appropriately plan your estate without severe tax consequences. An experienced estate planning attorney can advise you on various forms of bequests and trusts that can make tax burdens easier to bear for your loved ones. The more you know about various potential taxes, the more informed your estate planning decisions will be and the more comprehensive your estate plan will be.

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