When it comes to trusts and tax benefits, one of the most common questions we get is, what is a generation skipping trust? As you search for the right financial tools to shape your estate, you’re likely to come across a variety of different kinds of trusts. In many cases, a generation skipping trust is an ideal tool for grandparents or those who wish to carefully shape their financial legacy.
What is a Generation Skipping Trust?
This type of trust is an irrevocable trust, meaning that once it’s created, it’s more difficult than other tools to change or revoke it. While you won’t relinquish all of your power over the assets you place inside, it can be quite complex to make any shifts once it’s created.
With a generation skipping trust, you create a trust for those in the next generation. For example, the assets inside are not inherited by your children, but by your grandchildren instead. Your own children would never officially own the assets. Instead, they go directly to your grandchildren. The trust, however, is not just reserved for your relatives. You may create a generation skipping trust for anyone who is at least two generations below you – at least 37.5 years in legal terms. So, if you wished to leave a trust for a great-nephew, this is an excellent tool. Besides being at least two generations younger than you are, the recipient of the trust cannot be your spouse or your ex-spouse.
The Benefits of a Generation Skipping Trust
Now you know the answer to, “what is a generation skipping trust?” it’s time to look at when and why to use them. There are many reasons to consider this financial tool. Most who choose to create it do so for estate tax purposes. Were you to pass your assets in a trust to your children, then they pass them on to your grandchildren, your heirs would pay estate taxes twice on the assets. With this type of trust, however, you can typically expect the assets involved to be taxed just once – when the assets are passed to your grandchildren.
Another reason many people select this type of trust is that it helps to ensure the legacy you leave behind can’t disappear within a single generation. You will likely leave a different type of trust for your children. By leaving this type of trust for your grandchildren, you help your legacy to continue well beyond your children.
The Drawbacks of a Generation Skipping Trust
While there are some real benefits to this type of trust, there are also some potential drawbacks. The biggest drawback is the fact that any type of trust comes with a fairly large administrative burden. Creating and maintaining the trust requires quite a bit of time and resources. Because they’re an excellent tool to protect your legacy, though, they’re often worth that time and those resources.
The other real drawback with this type of trust is that for all of the tax benefits they might provide, they could actually create additional problems. Because so many people used this tool to avoid paying inheritance taxes twice, there is an additional tax on large generation skipping trusts. You are allowed to place $11.40 million in a generation skipping trust and have those left behind only responsible for the standard federal estate tax. If you are married, the two of you together can give $22.80 million. Additional money placed in a generation skipping trust is not only subject to estate taxes, but the generation-skipping transfer tax, which is 40% in all cases. In the event you intend to leave more, it’s best to talk to us to decide the best way to handle the additional money.
Is a Generation Skipping Trust the Right Tool to Meet Your Needs?
Estate planning can be complex, and a generation skipping trust might be the ideal way to help shape your legacy. It may also be a complicated option that just doesn’t suit your needs. What is a generation skipping trust? At Elder Law, we’ll work to help you select the tools you need to ensure your financial legacy is well protected. To learn more about how we can help, give us a call today at (561) 588-7512.