What is a Generation-Skipping Trust?
A Generation-Skipping Trust, or a GST, is an irrevocable Trust that does exactly what the title implies: it provides for beneficiaries— skipping over at least one generation. For context, the government views one generation as 37.5 years. So, as long as the person named as beneficiary is 37.5 years, or more, younger than you they can be named a beneficiary—regardless of whether or not they are a grandchild or family member.
In most cases, a Generation-Skipping Trust is set up so that the assets skip the trust maker’s children and pass them to their grandchildren instead. There are many tax benefits for doing this, which we will get to later.
Many families choose to use a GST in order to preserve their legacy for multiple generations and to instill their values into future generations. Because a Trust allows for the trust maker to require the trustee to ensure the guidelines put in place are followed, this allows grandparents to instill responsibility into their grandchildren, even if they have never met them.
One of the unique things about a Generation-Skipping Trust is that while you leave the assets to the second generation, if the assets earn any income while they sit in trust the first generation is allowed to benefit from them without any tax repercussion.
What Are the Benefits of a Generation-Skipping Trust
We already discussed how a Generation-Skipping Trust can allow you to pass down family values when it comes to financial responsibility and other values that matter to you.
Additionally, in the case of larger estates, a GST certainly benefits the generation it names as beneficiary, but the skipped generation can also benefit from the income the asset may earn.
Let’s take a look at the tax benefits of using a GST.
So, in the case of estates under the federal estate tax exemption level, there is no tax. (What really happens is that there is a Generation-Skipping Tax exemption that gets applied, but if the estate is under the federal estate tax exemption level, the GST tax exemption will cover the whole estate.) The government created the GST tax to ensure that people weren’t creating GST’s to avoid all tax liability. This tax comes into effect when the estate is valued over the federal estate tax exemption. So, if the estate is valued above that limit you have to be careful to apply the GST tax exemption to the correct assets.
The point of a GST is to offset tax liability and provide for future generations. An instance in which this could happen is if your children are well off and wouldn’t benefit from an inheritance. If you were to pass the inheritance to your children you may have to pay estate tax, and then your children may have to pay it to pass the inheritance down to their children. If you eliminate the middle step, and employ a GST, then everything skips your children and passes to the grandchildren. Estate tax is only assessed once on this asset.
Disadvantages of a Generation-Skipping Trust
The first disadvantage is that a GST is an irrevocable trust. Meaning once it’s created it is what it is. You cannot change or revoke it.
Another disadvantage is the potential for being taxed with an estate tax and a GST tax. This only happens in very large estates, so it’s best to consult with a seasoned estate planning attorney before opting out of this type of trust based on this alone.
As the name implies, this type of trust provides for grandchildren or further generations. Maybe you want to do that and exclude your children from receiving your assets. But if you don’t, this type of trust skips over them.
Maintenance fees can also be a concern. If you don’t have substantial assets to pay for the maintenance, this type of trust may work against your initial plan to keep as much money in the family as possible.
Why You May Employ a Generation Skipping Trust
Ultimately, how you plan ahead for the future of your legacy rests in your hands.
If you have substantial assets, your children are well cared for, and you have concerns about estate tax, maybe passing a portion or all of your estate to future generations through a GST is the right move for you.
It may also serve you if you want to plan for your grandchildren, and want to exclude your children altogether.
Estate Planning to Benefit Grandchildren
Maybe you’ve read this far and want to create an estate plan that benefits your grandchildren and future generations to come.
The GST is not the only way you can do this. There are many other unique ways to provide for your grandchildren through estate planning.
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