Wealth Preservation and Preventive Law Alert Number 13
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Another Critical Trust Mistake—Failure to Use Generation Skipping Provisions in All Trusts
You don’t want to dump assets onto a beneficiary who is already subject to estate taxes, creditors or lawsuits.
This Preventive Law Alert was written by: John Goodson, Colleen Manley and Christine Goodson Forakis.
These Preventive Law Alerts are patterned after an annual publication to all mountain climbers called “Accidents in North American Mountaineering” which writes up all mountaineering accidents describing the accident, what caused it, how it may have been prevented so that further mountain climbing catastrophes may be avoided. The Preventive Law Alerts are the equivalent of “Legal Accidents in North American Law” – a description of the legal catastrophe and how it may be avoided using preventive law techniques.
The Legal Catastrophe
Harold was a successful businessman and his son Jason an affluent doctor. Before Harold died, he left in his trust a large distribution for his son. Harold was already subject to a 45% hit in estate taxes because of the size of his own estate; however, after he paid estate taxes on his own estate, what he left to his son was subject to an additional 45% “tax haircut” after Jason and his wife Marilyn died. Also, if Jason had a significant malpractice suit the inheritance from his father’s estate would be up for grabs as well. These are just a few of the many legal accidents waiting to happen—all of which may be avoided by implementing Preventive Law procedures.
The Preventive Law Solution
With the Preventive Law approach, we find ourselves amending the trusts of parents to divert distribution to their children into “generation skipping sub trusts”. All it takes is a simple amendment. With this generation skipping trust amendment the children will have as an inheritance, only interests in their parent’s generation skipping trust earmarked for them. For instance, Harold leaves $500,000 worth of stocks in a generation skipping sub trust for himself during his lifetime and then on to Jason when he passes away. Jason will have what we call “grazing rights”, which is the right to ask for income during his life and whatever else he needs for health, education, support and welfare. Jason may take the distributions or leave them there for Jason’s children. In addition, Jason’s malpractice creditors and a divorced wife cannot force their way into the generation skipping sub trust, and when Jason dies, the sub trust will not be taxed with state or federal estate taxes.
You may never know what the size of your children’s estates will be or the extent of their exposure to lawsuits, therefore these generation skipping sub trust provisions must be in place in both yours and your parent’s trusts if you want to win the game of beating fickle fate.
Important Action Step 1
To be sure that your trusts have built in generation skipping sub trust provisions, Email John Goodson at jgoodson@gmdlaw.com. Ask how to set up your trusts so that this potential legal accident may be avoided.
Important Action Step 2
Email jgoodson@gmdlaw.com or call John Goodson (602 252-5110) with the names and email addresses of (1) family members, (2) friends, (3) colleagues, (4) business associates and personnel, (5) organizations/clubs, (6) customers or clients, (7) parents in your schools, or (8) anyone else who you think cares about this topic that you want to receive our Preventive Law Alerts. We will send the previous alerts and include your referrals on our email list to receive future alerts as they are published.
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For additional information, please call (602) 252-5110.