What is a generation-skipping trust?

A generation-skipping trust is a way for assets, funds, and inheritances to be transferred from one generation to those who are two generations away, skipping over the one in between. In other words, a generation-skipping trust is a way for a grandparent to include a grandchild as beneficiary in their trust, rather than the usual situation where a parent may leave a trust to his or her own child.

Purposes of a Generation-Skipping Trust

The purposes of a generation skipping trust are multi-level. In many cases, they are used because skipping a generation means saving on taxes. Depending on the amount of assets being transferred, each time the assets are transferred from one generation to another, they may be subject to estate tax, which can be extensive. Thus, if a family is wealthy, and there is no immediate need for the funds, a generation-skipping trust set up properly can exclude the funds from taxation for one generation. This can greatly reduce the amount of taxation by the time they pass on to the next level of the family. In other cases, if assets are not particularly valuable at a given time but are expected to appreciate greatly in the future, they may be put into a generation-skipping trust in order to give them time to grow.

In a situation where tranferred assets may be put at risk, a generation-skipping trust can protect the funds by not technically handing over ownership. In other words, in the case that an estate holder's child goes through a bad divorce, or is in a car accident and subsequently sued, he or she cannot lose the funds in the trust because they do not legally own those funds, even though they are granted complete access to them (depending on how the generation-skipping trust is set up).

The Generation in Between

This type of trust doesn't necessarily mean “leaving out” the generation in between. It's possible to set up rights for the generation in between to access the trust assets should they be needed. This right of access does not mean the funds will be taxed outright, as they would be if ownership were officially transferred to that generation. Instead, they are simply available for use but, if not used, will pass on to the next generation with essentially half the taxation they would have been subject to otherwise.

Getting Help with Your Generation-Skipping Trust

Generation skipping trusts aren't for everyone, but in specific situations, they can be very important to the security of a family's assets and the well being of future generations. Other options may include a protective trust or a spendthrift trust if the assets need to be protected from a particular beneficiary or protected from the hands of creditors.

Setting up a generation-skipping trust is a big decision and should be discussed carefully with your estate planning lawyer. An experienced attorney can assist you in choosing the right type of trust for you and can help to ensure the trust is set up properly to protect your assets.