Passing assets to your grandchildren can be a great way to ensure their future is provided for, and a generation-skipping trust can help you accomplish this goal while reducing estate taxes and also providing for your children.
A generation-skipping trust allows you to “skip” over the generation directly below you and pass assets to the succeeding generation. While this type of trust is most commonly used for family, you can designate anyone who is at least 37.5 younger than you as the beneficiary (except a spouse or ex-spouse).
One purpose of a generation-skipping trust is to minimize estate taxes. Estates worth more than $11.7 (in 2021) have to pay a federal estate tax. Twelve states also impose their own state estate tax, which in some states applies to smaller estates. When someone passes on an estate to their child and the child then passes the estate to their children, the estate taxes could be assessed twice—each time the estate is passed down. The generation-skipping trust avoids one of these transfers and estate tax assessments.
While your children should not utilize the assets in the trust, they can receive any income generated by the trust. The trust can also be set up to allow them to have some say in the rights and interests of future beneficiaries. Once your children pass, the beneficiaries will have access to the assets.
Note however, that a generation-skipping trust is subject to the generation-skipping transfer (GST) tax. This tax applies to transfers from grandparents to grandchildren, even in a trust. The GST tax has tracked the estate tax rate and exemption amounts, so the current GST exemption amount is $11.7 million (in 2021). If you transfer more than that, you may encounter the high 40% tax rate.
The trust can be structured to take advantage of the GST tax exemption by transferring assets to the trust that fall under the exemption amount. If the assets increase in value, the proceeds can be allocated to the beneficiaries of the trust. in addition, because the trust is irrevocable, your estate will not have to pay the GST tax even if the value of the assets increases over the exemption amount.
Generation-skipping trusts are complicated documents. Give us a call to determine if one would be right for your family.
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