1.  Generation Skipping Transfers

2.  The Three Taxes on a Transfer o Gift Tax If gift outside annual $14,000 exclusion If gift outside one time exclusion o Estate Tax Excess of estate passed to heirs above exclusions Exclusion – Unlimited Marital Deduction Exclusion – Charitable Deduction o Generation Skipping Transfer Additional flat tax on asset transfer

3.  Why tax transfer based on where recipient is on lineage chart or age of recipient? o Moves up the taxes on some assets that transfer at a low basis o Transfers “skipping” normal lineage against social norm  Skipped Generation o Two types of recipients – non-skip persons and skip persons o With a skip person in lineage (see Exhibit 13-2 on page 541) o With a skip person defined by age Generation is defined as 25 years Split for the first pass of transfers (12.5 years either way) Next generation add 25 years Skip is thus passing of assets to someone 37.5 years away

4.  Who is in lineage, who is not? o See Exhibit 13-3 on Page 542 Great Aunts and Uncles – outside lineage Descendants of Great Aunts and Uncles – outside lineage o Non-lineage recipients are “skip” persons based on age difference  Other Non-Skip Persons o Trusts can be skipped or non-skipped depending on the beneficiaries of the trust – one non-skipped beneficiary makes trust non-skipped trust o Predeceased Ancestor (non-skipped person above in lineage is deceased) – Skip person moves up one generation and may become non-skipped person

5.  When does transfer tax apply o Direct transfers to skipped person – direct skip Transferee is responsible for tax (40% flat rate) Trust making transfer, then trustee is responsible for tax o Taxable Termination When a non-skipped person dies and the remainder goes to the skip generation from the original transferee Trust is typically way – trust maker sets up trust to child and upon death of child, trust continues to pay or distributes assets to child’s children (grandchildren of trust maker) o Taxable Distribution Any distribution from a trust to a skipped person not part of a taxable termination

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7.  Filing Requirements o Inter vivos gifting (while alive) – by April 15 of year following gift o Direct Skips at Death Schedule R or R-1 of Estate Tax form 706 Due nine months after death o Taxable Distributions Filed by trustee Due April 15 of year following distribution o Taxable Termination Filed by trustee Due April 15 of year following distribution

8.  Dynasty Trusts o Trust designed to payout to future generations beyond first in line o Trust assets are not owned by any beneficiary Therefore assets do not “transfer” via estate to each succeeding generation No estate transfer – no estate tax o States determine when the assets must “vest” in a beneficiary for estate purposes Either 21 Years after death of youngest beneficiary Or 90 years maximum

9.  Dynasty Trusts -- continued o Generally family trusts for direct lineage of trust maker o Typically funded with non-real estate property o Designates which “state” laws govern trust o Selects trustee (non beneficiary) – usually two independent trustees Trustee service limited (must resign at certain age) Trust protectors named – can remove current trustees Trustees can terminate (if appropriate), transfer assets to new dynasty trust (if appropriate) and sell assets

10.  Dynasty Trusts - continued o Assets of trust are “protected” from creditors of beneficiaries (again the trustee owns the assets not the beneficiaries) o Divorced spouse (non beneficiary) cannot claim ownership of trust assets o Distributed income from trust to beneficiaries is taxed at the beneficiaries income rates and paid by beneficiaries o Non-distributed income is taxed at the trust and paid by trustee from trust assets

11.  Dynasty Trusts - continued o To manage long-term trusts with births and deaths Sub-generational trusts are made within the larger family trust Allows distributions to be allocated per stirpes o Funding of Trust Typically personal property only to avoid state laws on removing real estate from commerce Often life insurance policy used to fund trust as it “grows” tax free and tax free upon distribution

12.  Dynasty Trusts - continued o Termination of a dynasty trust Trust typically designed to terminate upon the death of the last lineal descendant Trustee usually has power to terminate and distribute assets to beneficiaries With no lineal descendants final beneficiary is usually a charity (family foundation for example)  In general dynasty trust is designed to pass on assets (and income from assets) to descendants free of estate, gift, and generations skipping taxes

13.  What are the implications for Financial Planning? o Need to understand that some gifts can incur another level of taxation Determined by recipients status Is significant reduction in “estate” o Dynasty trusts are very complicated so Drafting of trust must be done by a qualified expert State laws can impact the rules of the trust and the assets placed in the trust Trustees and Trust Protectors are important consideration  Questions?