A generation-skipping trust (GST) is a trust established for a beneficiary who is at least 37 ½ years younger than the grantor. The beneficiary can be any person, except for a spouse or ex-spouse, as long as they meet the age requirement.
Are generation-skipping trusts revocable or irrevocable?
Generation-skipping trusts are irrevocable trusts — meaning one that can’t be changed once established without the permission of its beneficiaries. The grantor of an irrevocable trust gives up ownership of the assets once placed in the trust.
Who might benefit from a generation-skipping trust?
A generation-skipping trust passes assets directly to your grandchildren (or another beneficiary who is at least 37 ½ years younger than you). If you have a significant amount of assets and a beneficiary that meets the age criteria, a generation-skipping trust is one tool you can use to reduce how much federal estate tax your estate could be subject to.
How do the estate tax savings work?
The main benefit of passing assets directly to your grandchildren instead of having them pass through your direct children is that a taxable transfer event is eliminated from the process.
If you pass your estate directly to your child and they then pass is to their child (your grandchild), the estate tax is levied twice—once per transfer. Using a generation-skipping trust allows your estate to avoid this layer of estate taxation.
Not only can a generation-skipping trust help your heirs save money on the federal estate tax, but also on the dozen states (plus Washington, D.C.) that also have their own estate taxes. Some match the federal exemption ($11.7 million in 2021), and others start at less than $1 million.
Read more: Four Ways to Give Your Home to Your Favorite Child
Are there other benefits of a generation-skipping trust?
If you use a generation-skipping trust, your children won’t pay taxes on any of the assets in the trust since they will never take possession of it. However, depending on how its set up, a generation-skipping trust may still allow your children earn income on the assets inside the trust. Effectively, the trust can be structured to provide for multiple generations of your family.
Be mindful of generation-skipping transfer taxes
It’s important to note that the generation-skipping transfer tax of 40% still applies to assets that are distributed from a generation-skipping trust if they are valued at greater than the current federal estate and gift tax exemption threshold (for 2023, this is at $12.92 million per individual).
State inheritance or estate taxes still also apply to trust distributions.
Don’t Try to Set Up a Trust On Your Own
In summary, a generation-skipping trust could be a great tool for you if you have a large estate and you have family or friends who are at least 37 ½ years your junior to whom you’d like to leave assets. But a generation-skipping turst isn’t something you can set up without guidance. These are complex estate planning vehicles, and you’ll need help to set it up from someone with experience.
If you have questions about a generation-skipping trust or want to know more about estate and tax planning, click here to schedule a free meeting with a financial advisor.