Estate planning does not always have to follow the traditional path of leaving assets to your children and expecting those assets to eventually pass to your grandchildren. For some families, it makes more sense to plan further ahead.
A generation-skipping trust is an estate-planning tool that allows you to hold assets in trust for your grandchildren or later generations rather than having those assets pass outright through your children first.
Why Would Someone Skip a Generation?
There are many reasons a parent may decide that certain assets should ultimately benefit grandchildren rather than be distributed outright to adult children. Your children may already be financially secure. You may want to preserve a family cottage, investments, business interests, or other assets for future generations. You may also want to create a lasting financial resource for your grandchildren’s education, health, housing, or other needs.
A generation-skipping trust can provide that structure while allowing you to establish the rules for how and when the assets will be used.
The Assets Stay Protected in a Trust
“Skipping” your children does not necessarily mean excluding them from your estate plan entirely. A properly drafted plan can provide different benefits to different generations. Depending upon the family’s objectives, children may receive other assets or may even have certain rights or responsibilities involving the trust while the assets held in the generation-skipping trust are preserved for grandchildren.
Keeping assets in trust can also provide protections that an outright inheritance cannot. Rather than a grandchild receiving a substantial inheritance at age 18 or 21, the trustee can manage and distribute assets according to standards established by the grandparent. The trust might provide funds for education, purchasing a first home, starting a business, health expenses, or other important needs while protecting the remaining assets for the future.
It Can Create a Legacy Beyond One Generation
One of the greatest advantages of trust planning is the ability to think beyond the next inheritance. Suppose grandparents leave investment assets outright to their children. Those assets become the children’s property. The children may spend them, invest them, lose them, or ultimately leave them according to their own estate plans.
A generation-skipping trust takes a different approach. The grandparents can establish a structure designed to preserve those assets for grandchildren; and, if desired, great-grandchildren and later generations. Instead of simply transferring wealth, the family is creating a plan for preserving and managing it.
There Are Important Tax Considerations
The word “generation-skipping” also has a specific meaning under federal tax law. The federal Generation-Skipping Transfer Tax (GST tax) is a separate transfer-tax system that can apply when property passes to someone generally two or more generations below the person making the transfer, such as a grandchild.
That does not mean that every trust for grandchildren will result in a GST tax. Federal law provides a generation-skipping transfer tax exemption, and careful planning regarding how that exemption is allocated can be extremely important. For larger estates in particular, the tax provisions should be considered when the trust is drafted, not after the transfer has occurred.
Is a Generation-Skipping Trust Right for Your Family?
There is no single estate plan that works for every family. A generation-skipping trust may be worth considering if:
- Your children are financially established and you want to provide directly for grandchildren;
- You want to preserve family wealth for more than one generation;
- You are concerned about grandchildren receiving an inheritance too young;
- You want assets professionally or responsibly managed over a longer period;
- You want to preserve particular family assets for future generations; or
- You have a larger estate and want to explore multigenerational estate and tax planning.
The important question is not simply “Who should inherit my assets?”
A better estate-planning question may be:
“What do I want these assets to accomplish for my family over the next several generations?”
A thoughtfully designed trust can help turn that answer into a lasting estate plan.
The Woods Law Office PLLC
Estate Planning • Elder Law • Probate & Trust Administration • Asset Protection
This article is provided for general informational purposes and is not intended as legal or tax advice. Generation-skipping trusts can involve complex estate, gift, and generation-skipping transfer tax considerations. Individual circumstances should be reviewed with appropriate legal and tax professionals.
