What is a generation-skipping trust?

On Behalf of | Feb 7, 2019 | estate planning | 0 comments

As a reasonably well-to-do Californian, you likely want to pass your estate down through your family in the most advantageous ways possible. If you have not yet considered one or more generation-skipping trusts as vehicles by which to do this, you may wish to educate yourself on the advantages this type of trust offers.

As Investor Guide points out, you can designate anyone as the beneficiary of a generation-skipping trust as long as that person is at least 37-1/2 years your junior and is not your spouse or former spouse. Not surprisingly, however, most people name a grandchild as the beneficiary of their generation-skipping trust. If you choose to do this, you can set up a separate trust for each of your grandchildren, or you can set up one trust naming all of your grandchildren as the beneficiaries thereof.

Keep in mind that just because you name your grandchildren as your generation-skipping trust beneficiaries does not mean that you cut your children out of the assets you transfer into this trust. One thing you can do, for instance, is to have your trust contain a provision whereby your children receive the income that the trust’s assets produce during their respective lifetimes, after which your grandchildren receive the actual trust assets.

Tax advantages

Your generation-skipping trust takes advantage of both the generation-skipping transfer tax exemption and the estate tax exemption. Each represents $5.49 million assuming you are the sole trustor and $11.2 million if you and your spouse are joint trustors.

As its name implies, you take the generation-skipping transfer tax exemption just as soon as you establish the trust and place the assets in it that will ultimately go to your grandchildren. At your death, your estate takes the estate tax exemption.

Further advantages

Generation-skipping trusts offer more than just tax savings. Suppose, for instance, that one of your married adult children gets a divorce. His or her former spouse cannot and will not receive any benefit from the trust assets. Or suppose one of your children encounters financial difficulties and cannot pay his or her bills. In this situation, all trust assets remain beyond the reach of your child’s creditors as a means of debt repayment.

This is general educational information and not intended to provide legal advice.