22 May What Is a Generation-Skipping Trust?
If you have grandchildren, you can use a generation-skipping trust to pass some of your assets directly to them. This way, you can leave an inheritance for your grandchildren without burdening their parents’ estates. And not only do generation-skipping trusts avoid probate, they also keep estate taxes to a minimum.
Here’s how generation-skipping trusts work, and how they can benefit your family.
How Do Generation-Skipping Trusts Work?
A generation-skipping trust (GST) works exactly as it sounds—it skips a generation. The beneficiaries of a GST must be two or more generations (or at least 37.5) years younger than you. With a GST, you can leave your assets to a grandchild, great-grandchild, and anyone else who fits the age gap, even non-family members.
A GST is a type of irrevocable trust, so you cannot revoke it or make any changes after it’s set in place. Assets in revocable trusts are vulnerable to creditors, but the assets in an irrevocable generation-skipping trust will remain safe from creditors for as long as they stay in the trust. Once ownership of the assets is transferred to a beneficiary, then the assets become vulnerable again.
Four Benefits of Generation-Skipping Trusts
1: Less Taxes on Large Estates
If you have a large estate, a generation-skipping trust can help you minimize your tax liability. As of 2023, estates valued at over $12.92 million are subject to the federal estate tax. But by placing some of your assets in a GST, you can reduce the size of your estate and avoid paying those taxes.
A GST can also help minimize estate taxes for your beneficiary’s parents, because the trust won’t be part of their estate. For example, if you were to pass the assets to your son, who then passed them to your granddaughter, and both estates exceeded the tax threshold, then the estate tax would have to be paid twice. But with a GST, your family legacy can skip a round of estate taxes.
You can transfer up to $12.92 million to the beneficiaries of a generation-skipping trust without incurring the generation-skipping transfer tax (GSTT). A GSTT is a type of federal tax placed on gifts and inheritances left to grandchildren that skip over your children to avoid estate taxes.
2: Both Generations Can Benefit from the Assets
A generation-skipping trust can still financially benefit the generation in between. For example, as the grantor, you can give your son access to the income earned by assets in the trust, even though your granddaughter is the beneficiary. After the assets have been distributed to your granddaughter, your son will no longer be able to access the income.
3: You Have More Control Over Asset Distribution
Unlike a will, a trust lets you dictate exactly how and when its assets will be distributed. You can select the age at which your beneficiaries will inherit the GST, so that their parents can continue to benefit from the income beyond your death, if you wish. You can even leave instructions for the assets to be distributed in a series of installations, instead of one large sum.
4: Generation-Skipping Trusts Avoid Probate
As with any trust, a generation-skipping trust also avoids the long and costly probate process. The assets in the trust will automatically transfer to your beneficiaries according to your terms, without interference from the court. Knowing that the transfer will go smoothly can give you and your entire family peace of mind about the future.
Arizona Trust Attorney
If you’re interested in setting up a generation-skipping trust or any other type of trust, contact Phelps LaClair. We’ve spent the last 40 years helping Arizona families create and manage trusts that protect their assets and benefit their families. We’ll help you ensure that your assets end up in the right hands at the right time. Call us at 480-892-2488 today to schedule a free consultation.