Generation Spanning Trusts

Stuart R. Morris created a new type of trust, called the Generation Spanning Trust™, to benefit our clients’ beneficiaries. Intricately designed and highly detailed, this trust allows individuals to set aside up to $5.25 million, or $10.5 million for a married couple, in a trust for the benefit of their descendants. The trust will avoid estate taxes for 360 years in the state of Florida and be protected from the beneficiaries’ creditors, as well as from spouses in the event of a divorce. It also allows the individual establishing the trust to designate the beneficiary as a trustee of the trust and to determine the level of control the beneficiary should have over the funds.

The generation skipping transfer tax (GST tax) is a tax imposed, in addition to estate tax, on transfers passing to grandchildren or more remote descendants. All taxpayers possess a GST tax exemption ($5.25 million for an individual and $10.5 million for a married couple) to be used during their lives, or at death, to exempt transfers outright or in trust. However, proper GST tax planning necessitates placing assets in trusts, as opposed to making outright distributions to beneficiaries since the latter are subject to estate tax upon the beneficiaries’ death.

This technique can be described as follows: During a client’s life or at death, assets equaling the GST tax exemption are placed in a Generation Spanning Trust™. The beneficiaries of the trust will receive the full benefit of the trust during their lifetime and the assets will not be included in the beneficiary’s estate. The assets will also not be subject to GST tax in the beneficiary’s estate. This trust allows up to $5.25 million for an individual, or $10.5 million for a married couple, to be exempt from Federal estate and GST tax for 360 years!

Assuming that each beneficiary passes away after 2012 and would be in the 40% estate tax bracket and that the Generation Spanning Trust™ is funded with $5 million at death, the tax savings would seem to equal $2,000,000 (40% x $5 million). In actuality, the tax savings will be significantly greater. To compute the actual tax savings, one would multiply 40% by the value of the trust at each beneficiary’s death. For example, if the trust grew to $10 million, the tax savings would be $4,000,000 (40% x $10 million).

The trustee of each trust has the authority to distribute trust assets at any time for the beneficiary’s health, support, maintenance or education. Upon a beneficiary’s death, his or her share passes to his or her descendants, to be held in this trust for their benefit, pursuant to the foregoing provisions. The beneficiary could also elect to modify the terms and conditions upon which his or her descendants receive the assets in trust. This enables the assets to remain in trust (and excluded from the beneficiary’s estate) until Florida law requires distribution, which is currently 360 years. Furthermore, the trust allows the trustees to change jurisdiction of each trust to allow a longer perpetuities period and prevent ultimate distribution. This flexible planning allows a significant reduction in estate taxes from generation to generation and protects the trust assets from creditors and divorcing spouses.