Family Dynasties and the Generation Skipping Tax

In the United States for the last twenty-five years certain wealthy families have been taxed differently than other wealthy families solely as a result of when the wealth was accumulated.

Trusts have been around for hundreds and hundreds of years.  Even living trusts have been around for a long time.  Today estate planning attorneys in most states routinely recommend a living trust to their clients.  For example in California – it does not matter if a client is in Los Angeles, Manhattan Beach, Culver City or anywhere else in the state – it has been this way for well over twenty years.  In the eastern United States, it has been a shorter period of time.

In 1986 Congress passed a tax law that included the federal generation skipping tax (GST).  In a nutshell, the GST only permits an individual to pass a certain amount of money to someone more than one generation removed from him/her without incurring a tax on the transfer.  The tax on the transfer is in addition to any estate tax that might have to be paid and is generally at the same rate as the estate tax rate.  The purpose of the GST is to discourage wealthy people from skipping a generation.  The idea is for Uncle Sam to get estate tax at every generation.

Congress when they passed the law specifically exempted any trusts that were both in existence and irrevocable on September 25, 1985.  Therefore, families like the Kennedys play by a different set of rules than the Gates’ and the Bloombergs.  You see, families inheriting new wealth, have to pay a federal estate every generation; while “older” wealthy families do not have to pay Uncle Sam if they had created irrevocable trusts prior to 1985.

What do you think?  Should families who created irrevocable trusts prior to 1985 continue to get this advantage of a grandfathered GST tax?  Should legislation be passed abolishing the distinction?