The Joint Committee on Deficit Reduction, six House Members and six Senators, is supposed to agree on how to reduce the national deficit, and report to the House and Senate on December 9. They have held fifteen closed-door meetings. Nobody outside the Committee knows what they have been doing. I hope they do.
The Republicans and Democrats both propose to revise the Internal Revenue Code, but there is no clue as to how they will do this. Now the first $5,000,000 in an estate is free of tax. Reducing this to $3,500,000 is a possibility.
The generation-skipping transfer tax (GSTT) would be a good target for change. The GSTT is intended to tax bequests that skip generations. If Charlie leaves his son, John $2,000,000 and John leaves it to his child, Jack, then the estate tax will apply in John¹s estate, and in Jack¹s estate when he leaves it to his child, Jill, and on and on.
If Charlie leaves $2,000,000 in trust for John for life, then to Jack outright, the asset is not taxed in John¹s estate because all he had was a life interest. The trust has skipped a generation (John). The GSTT applies when the funds are distributed to Jack.
When the GSTT was enacted there was an exemption of $1,000,000 (now $5,000,000). When Charlie established a trust, he could designate $1,000,000 which (with growth over the years) would be exempt from GSTT for the life of the trust.
Trusts were originally subject to the rule against perpetuities, which limited the life of trusts to something under 100 years. Some states have abolished the rule against perpetuities, so it is possible to create a "Dynasty Trust" which will last forever. Charlie could establish a trust of $5,000,000, allocate the GSTT exemption to the trust, and the funds would flow down through the generations with no federal estate tax ever.
Congress did not intend that the GSTT exemption would last forever. The Committee may suggest that the GSTT exemption be limited to two generations. This would essentially end the appeal of the Dynasty Trust.
If you would like to create a Dynasty Trust while the opportunity remains, contact us before the Committee acts.
