Should this inheritance skip a generation?

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 Q. My parents want to leave me their money when they die, but I’m thinking there could be advantages to leaving it directly to my kids, 3 and 1. I won’t need an inheritance to have a successful financial life. Help!

A. Planning ahead for an estate is always a smart move.

The federal exemption for estate taxes is $5.43 million in 2015, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence. In New Jersey, the estate tax exemption is $675,000.

“If your parents estates are over the estate tax exemptions, then tax would be due unless the assets of the first to die are left to the spouse,” she said. “If this is the case on the first death, then taxes may be due on the estate of the second to die.”

If your parents were to leave their money directly to your children — their grandchildren — your parents would be subject to generation skipping tax (GST) on the transfer, Daquila said.

The GST exemption for 2015 is the same as the gift and the estate tax, which is $5.43 million. In New Jersey, there is no GST tax so an estate tax would apply, she said.

Under this scenario, only one set of estate taxes would be paid rather than twice, such as when you inherited and then again when you passed the assets to your children, she said.

If your kids would inherit their grandparent’s money, then this would be subject to the GST tax since it skipped over you and went directly to their grandchildren.

“As long as the total amount of all transfers to a second generation are under the $5.43 million in their lifetime, then there should be no GST tax due,” Daquila said. “Each of your parents would have the $5.43 exemption.”

If your parents go this route, because of your kids’ young ages, they should consider leaving the inheritance in a trust for the children.

The trust would serve as a layer of protection, Daquila said.

“The trust could stipulate when and how the children can receive distributions and your parents could decide on who to appoint as the trustee,” she said. “The trustee would oversee the administration of the trust and make decisions regarding the distributions according to the terms that your parents set up in their will or trust document.”

Your parents can also decide on what age the trust would dissolve and your children would receive the remainder of the trust, Daquila said.

“The negative to leaving the sum of money in the trust is that there may be some administrative costs involved in administering the trust,” she said. “Income tax rates are also higher for trusts. There would also need to be a tax return prepared on an annual basis.”

Your parents should sit down with an estate planning attorney and someone who understands their financial situation before they make a big move like this one.

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This story was first posted in August 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.