Transfer Taxes

There are three different types of transfer taxes which can affect the decision of how to
set up and fund a dynasty trust.

Gift tax is imposed upon the value of gifts made during the giver's lifetime. This is
somewhat mitigated by an annual gift tax exclusion of $10,000 per year, per beneficiary
(indexed for inflation for gifts made after 1998). The exclusion allows you to give annual
gifts of up to $10,000 (or, after 1998, the indexed amount) to each of your beneficiaries
while you are alive, free of Federal gifts tax. If you are married, that amount doubles.

Estate tax is imposed upon the value of the assets you own at the time of your death.

Generation-skipping tax is imposed on the value of any assets passed on either to
grandchildren or to more remote generations during your lifetime or at death. It should
be noted that the generation-skipping tax is imposed in addition to gift or estate taxes.

In addition to the annual exclusion mentioned above, gifts of u to the "applicable
exclusion amount" (as shown in Chart A) may be made without incurring Federal gift
tax, to the extent you have not made gifts totaling the exclusion amount during your
lifetime. Similarly, when you die, you may pass on an estate that, when combined with
those gifts, equals up estate taxes.

Creating the Generation-skipping Trust

Generally, you may create a generation-skipping trust during your lifetime or at the time
of your death. There are advantages and disadvantages to both of these options.
Retaining the assets while you are alive and creating the trust at death allows you to enjoy
the benefits of the assets during your lifetime, whereas placing them in trust will deny
you those benefits.

On the other hand, the million dollars you place in trust now may grow to become
substantially more at the time of your death. Importantly, if you select this option, both
the million dollars placed in trust and the appreciation it enjoys during your lifetime, if
any, are removed from your estate and thus are not subject to estate taxation.

Additionally, by creating the trust now, the amount you pay in gift taxes will also be
removed from your estate if—and only if—you live at least three years after making the
gift.

Taken together, this means that creating the trust while you are living will result in less
total tax paid and more assets available to your heirs and beneficiaries.

Application of State Law

While most states have a law which limits the length of time assets may remain in trust
for the benefit of future generations, Florida has recently amended it's rules against
perpetuities which allows trusts to continue virtually indefinitely. This means that most
types of assets held in the trust will benefit descendants forever without being subject to
transfer taxes. Trust accountings are not required to be filed with a court, resulting in
lower costs in the administration of the trust.

Funding the Trust

Once you create the generation-skipping trust, careful consideration should be given to
selecting the property to add to it and the timing of those additions.

Low cost basis property

There are disadvantages in funding the tryst with property that has a low income tax cost
basis. Doing so results in that property's basis remaining low after the gift is made, and
foregoing the opportunity for that property to acquire a new cost basis at death, equal to
its then fair market value. Your legal and financial advisors should be consulted in
selecting assets to maximize any valuation discount available to you, or to identify
property which can be expected to appreciate.

Multiple year funding

You must live for at least three years after making a taxable gift in order for the gift tax
you pay to escape estate taxation. Therefore, you may wish to make the largest gift you
can as soon as you can to allow the three years to run, However, if you do not fund the $1
million lifetime generation-skipping trust entirely in one year, you should consider
funding over several years to further minimize transfer taxes. This may be possible, if
the generation-skipping trust is structured to take advantage of your $10,000 ( or
$20,0000) per year per beneficiary gift tax exclusion.

Investing the Trust

Because a generation-skipping trust is designed for multiple generations, the trust's
investment objective, presumably, would be long-term growth. The appropriate level of
growth to seek (and the accompanying level of risk) depends largely on how this trust fits
into your family's total financial picture. If the trust represents a relatively small portion
of your family's future wealth, growth objectives can be set fairly aggressively. If,
however, the trust represents a more substantial portion, a more conservative growth and
risk profile might be appropriate. The benefits of pursuing more aggressive investment
goals are illustrated in Chart B.

Any good financial plan will take your family's financial future into account—setting
appropriate investment objectives and creating a plan to achieve those objectives at a
minimum level of risk.

Conclusion

A properly structured, funded and invested generation-skipping trust can be a powerful
tool in achieving significant transfer tax savings across generations. Your lawyer or
professional advisor is in the best position to determine if it is an appropriate tool for your
family. Your advisors should also be consulted in determining when to establish and
how to structure the trust to achieve optimal transfer tax result.