In legal terms, a generation-skipping trust (often abbreviated as GST) is a type of trust set up to benefit someone other than the original grantor’s children or other descendants. It is used to protect assets from two levels of taxation – from the grantor’s estate and that of their descendants. The trust bypasses these generations of taxation, making it an ideal tool for asset protection and estate planning.
How Does a Generation-Skipping Trust Work?
At its core, a generation-skipping trust does exactly what its name implies: it bypasses one or more generations of the grantor’s family. When the grantor passes away, their estate is taxed at the federal inheritance tax rate and then those assets must go through probate. This process can be lengthy and expensive, depending on the size of the estate.
A generation-skipping trust instead allows the grantor to assign the assets to named beneficiaries, often other family members or charities. That beneficiary can receive their share of the trust, either while the grantor is alive or shortly following their death, without having to go through probate.
In addition, the trust prevents the beneficiaries from having to pay federal estate taxes, thereby bypassing the estate taxes imposed on descendants.
Modern Examples of Generation-Skipping Trusts
Generation-skipping trusts are often used to pass down family business ownership, or to ensure that certain assets and wealth remain in the family. In today’s world, this type of trust is becoming a more and more common estate planning tool for high-net-worth individuals. The trust can be used to pass on financial assets, real estate, artwork and other valuable possessions.
Benefits of a Generation-Skipping Trust
The primary benefit of a generations-skipping trust is that it can save the beneficiary from having to pay federal estate taxes, particularly if the trust is carefully managed and meets certain criteria. It also protects the assets from being subject to the claims of creditors. Additionally, the trust can help with asset protection, by ensuring that the assets remain in the family and are not taken away from heirs.
Generation-skipping trusts can also provide privacy and flexibility for the beneficiary, since the trust terms can often be tailored to meet the specific needs of the individual or family.
Conclusion
A generation-skipping trust is a powerful tool for asset protection and estate planning. It allows grantors to bypass taxation of their estate and protect their assets from creditors, as well as retain control over who inherits the assets. The trust also provides flexibility, privacy, and a tax-advantaged way to pass wealth to generations to come.