Political uncertainty is swirling around us. If it has you feeling nauseous, remember that political uncertainty comes with each election cycle. It happens over and over in our lives, but this election cycle, too, shall pass!
As you wade through each election cycle and face uncertainty, consider the planning you have put in place. If your estate plan was developed in a hasty manner to address a specific issue in the past, then it is unlikely to accomplish your objectives as the political winds change. However, a thoughtful, long-term approach to obtaining your objectives should be your focus. Objectives should include maintaining control while you’re alive.
Protecting your assets from outside threats when they move to the next generation and planning with long-term strategies can reduce tax exposure for multiple generations. Objectives should not include the latest fad.
Unfortunately, a lack of understanding about some of the available techniques to accomplish your objectives can deter you from considering them or putting them into practice. Here’s an example.
One way to get the absolute, undivided attention of your children is to mention to them that you are thinking about leaving their inheritance to them in a “generation-skipping trust.”
A lack of understanding sparks fear any time you mention the word “trust,” and particularly when you add “generation-skipping.” They will think you’ve decided to disinherit them and leave everything to your grandchildren — confirming their suspicions that you love the grandchildren more than them!
Skipping taxes, not heirs
But information and understanding can calm fears and eliminate your children’s false suspicions. A generation-skipping plan means skipping taxation, not skipping your children.
For example, if you create a traditional estate plan with no generation-skipping provisions:
You leave your farm to your farming son, George. You leave other assets to George’s two siblings. At the time, George had started his own farm, which is worth about one-tenth of the farm he receives from you. Fast-forward as George lives another 30 years. He teaches at least one of his own children the value of land as a stable, long-term investment, and instills in them his love of the farm life.
The farm will appreciate during George’s life. When George dies, the farm could have doubled or even quadrupled in value. Ninety percent of the farm was inherited; 10% was his own purchase. Under current tax law, this may not be an issue.
If the political environment changes, George’s children (your grandchildren) could be paying significant estate taxes on that farm when George dies! This will create a huge problem as George tries to pass the farm, and the rest of his estate, to your grandchildren.
What if you were in the same situation and included generation-skipping provisions in your planning?
George, understanding how the trust protects him and his family, gratefully receives the farm from you in a trust. The trust protects the farm from catastrophic health care costs, lawsuits, divorce and similar predators. George has the right to farm it and keep the income. If necessary, he can sell land and reinvest in different land, or spend the proceeds.
George keeps the farm intact and instills the love of farming in a grandchild. At George’s death, the farm has quadrupled in value. Even though it is in the trust, George can leave it to any of your grandchildren, under any conditions George chooses.
Now, because you included generation-skipping provisions in your plan, the property (and whatever it has grown to or is reinvested in) that came from you will incur no estate taxes, regardless of what the exemptions may be in the future. This should also allow George to pass his own assets to your grandchildren without paying taxes.
Now, are you sitting down? The farm or assets that passed to grandchildren can now grow for another generation, and pass to George’s grandchildren free of death tax!
This generation-skipping principle can apply to all the children, not just the farmer. If you have any children you think might grow (not blow!) their inheritance, consider generation-skipping planning. Whatever you pass on, plus all growth during the life of the child, passes free of estate tax to another generation. The assets would potentially get a full step-up in basis at each generational transfer as well.
The law in most states allows your children to apply the same principle for the next generation, and the next and the next. In Colorado, the limit is 1,000 years — which is a very long time to avoid estate tax on the family farm!
Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession, and legacy planning objectives. He is the principal of Dolan & Associates P.C. in Brighton and Westminster, Colo. Learn more at his website, estateplansthatwork.com.