If you intend to gift money to grandchildren or younger generations, then you may want to consider forming a New Mexico generation-skipping trust as part of your estate planning agenda.
Just like the name states, a generation-skipping trust is intended to provide distributions to family members younger than the trust creator by two or more generations (e.g., grandchildren). This arrangement ensures that younger generations have access to funds acquired throughout their lifetime, with the potential to reduce taxes owed, as well.
Reach out to New Mexico Financial & Family Law if you have questions about passing down wealth to loved ones and whether a generation-skipping trust would be the best choice for your goals. We are here and ready to talk about estate planning, ensuring that you can know, with confidence, that your family will be taken care of for generations to come.
Schedule a no-obligation case review to go over your current plans, discuss your goals, and work towards a comprehensive strategy for this life and the next. Call 505-503-1637 or contact us online to book an appointment with an experienced New Mexico generation-skipping trust lawyer near you.
In many ways, your estate plan represents the culmination of everything you were able to achieve financially in your lifetime. By setting aside your most critical investments and assets into a trust, you can all but guarantee that your beloved family members will receive distributions in order to support their financial future.
Not only that but the assets will be managed by a trustee, allowing those assets to continue to appreciate and earn income that can be used to support your family’s living expenses.
When you reach out to a generation-skipping trust attorney in New Mexico, they’ll help you review all of your options for moving ahead with an estate plan. The process typically starts with a review of your will and any other existing estate planning documents, as well as a general review of assets that you intend to hand down.
Then, your New Mexico trust planning attorney will listen closely to your goals, gaining an understanding of what you hope to achieve through your carefully laid estate plans. Often, individuals set a goal to gift to multiple generations of family members, for instance, or to create an instrument that can help support their family with a steady income.
With these goals in mind, your New Mexico estate planning attorney can then go over possible trust formation options with you. They’ll draw up a slate of recommended estate planning instruments, which may include a generation-skipping trust.
New Mexico Financial & Family Law goes the extra step by considering possible complications or unexpected risks towards achieving your goals. For example, we can help you build in contingencies for your generation, skipping trust that accounts for situations where relatives get divorced after you have passed on.
Likewise, we can review your portfolio and include guidance for trustees to monitor any high-volatility assets, possibly replacing them with lower-volatility ones once a certain amount of market disruption has been reached.
When a generation-skipping trust is formed, the trust creator, or grantor, transfers ownership of personal assets into the trust. These assets can include cash as well as securities like stocks, bonds, stock options, and equity shares in privately held companies.
Ownership of real property can also be transferred to the trust while still ensuring that the property can be used and enjoyed by family members as intended.
Property held in the trust is managed by a trustee. The trustee is tasked with ensuring that the trust maintains a steady appreciation of value through sound management.
They are also responsible for ensuring that physical assets are well cared for.
The trust will eventually distribute assets to beneficiaries. In the case of a generation-skipping trust, the beneficiaries will be grandchildren of the grantor, or they can be other designated individuals at least 37.5 years younger than the grantor.
Additionally, beneficiaries can be named as those who do not directly receive transfers of assets from the trust but instead receive income derived from the trust’s investments. In this way, the immediate children of the grantor can benefit from the generation-skipping trust for a time before the remainder of the trust’s value is transferred to younger generations.
There are many benefits to creating a New Mexico generation-skipping trust, including:
Note, too, that a generation-skipping trust can be created in addition to or in combination with other trusts and estate-planning mechanisms.
For example, you can create a charitable lead trust to make an annual gift for a time to select charities, with the remainder of the assets transferred to your next of kin. That way, you can set some money aside specifically for grandchildren, and younger generations in one account and then also set aside money in a tax-advantaged way for a charitable purpose with the intention that the remainder will go to your most immediate survivors.
After your death, there are a number of possible taxes that can affect inheritances that you should be aware of:
Assets transferred into an irrevocable trust during the grantor’s lifetime (referred to as a living trust) are effectively removed from the grantor’s estate, potentially reducing estate taxes.
In addition, any assets transferred into a trust at the time of the grantor’s death — while counting as part of their estate — can qualify for the grantor’s remaining estate tax and gift tax exemptions. Normally, the exemption amount is limited by year, but transfers upon death can allow the grantor to make use of the full extent of their remaining lifetime exemption at once.
During the grantor’s lifetime, they can designate a trust as a grantor trust, meaning the IRS treats trust income as personal income for the grantor. This status reduces taxes compared to paying taxes as a trust. Further, paying these taxes will reduce the tax burdens of the eventual beneficiaries.
Certain generation-skipping trusts can enable the grantor to treat assets designated for a beneficiary as a non-guaranteed future interest. This status means that the distribution does not count as a current generation-skipping transfer, which means that it does eat into the grantor’s GSTT exemption.
Just like estate taxes, individuals have a limited amount they can exempt from generation-skipping transfer taxes. If they are close to this limit (which would only happen for very wealthy families), then a generation-skipping trust can help them set aside money and pay for the interest as their personal income, reducing the tax burden of the assets without eating into their gift tax or GSTT exemptions.
Distributions can count as ordinary income for the beneficiary. While that may sound bad, the truth is that trusts will pay much more in taxes compared to an individual, so having the individual pay income taxes upon transfer reduces the overall tax burden.
A “step-up in basis” refers to a special exemption that reduces the capital gains assessed for assets passed on to beneficiaries. Basically, heirs can adjust an asset’s principal value to be equal to its value at the time of the relative’s death.
What that does is essentially freeze capital gains, which reduces the total capital gains taxes paid, even as the asset continues to appreciate.
For example, a house purchased for $100,000 in the 1970s may be worth $1 million now. Normally, someone receiving this asset and selling it would owe capital gains taxes on at least $900,000 of those gains.
If the asset is “stepped up” on a cost basis, they would instead owe $0 in capital gains taxes if they sold the home immediately after receiving it. If they held onto the home and it continued to appreciate, then they would still reduce the subsequent capital gains assessed by that $900,000 amount.
A generation-skipping trust can, technically, exist for decades at a time, making it able to provide distributions for multiple generations in the future.
In a state like New Mexico, the trust must eventually terminate, as the state’s rule against perpetuities (N.M. Stat. § 45-2-901) makes it so the trust can only last either 90 years or 21 years after the death of a designated individual who was alive at the time the trust was formed. However, some states like Nevada and Alaska have extended their rule against perpetuities for many centuries, making the trust able to survive for many generations into the future.
Those forming dynasty trusts should use care to word their trust in such a way that ensures that their descendants receive distributions as intended while building in enough flexibility to account for unpredictable factors that can emerge as time passes.
Trust formation can be complicated, but it can also be exciting since you are creating a one-of-a-kind instrument that was made specifically for your beneficiaries. At the same time, you will need to make important decisions, like who to name as your trustees and what language to build in to prepare for contingencies like the death of a beneficiary.
Work with New Mexico Financial & Family Law to get assistance with planning ahead for the future — and for your family’s future generations. We can help you provide for beloved grandchildren while ensuring that your assets remain in good keeping until they are distributed.
Learn more about your options for trust formation during a confidential case evaluation, with no obligation to work with our firm further afterward. Schedule a no-risk case review with our New Mexico generation-skipping trust attorneys today when you call 505-503-1637 or contact us online.
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