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What is a generation-skipping trust?

| Jan 5, 2021 | Estate Planning |

Trusts are powerful tools that can protect assets and provide for loved ones. One relatively common type, the generation-skipping trust, can provide for family members who haven’t even been born yet, well into the future.

Basics of trusts

Put simply, a trust is a way of dividing ownership in property. A trustee is put in charge of managing the principal property for the benefit of the named beneficiaries. In a living trust, the grantor who provides the original principal can also be the beneficiary.

Trusts are particularly useful as part of an estate plan. The assets in the trust are not counted as part of the deceased person’s estate, and therefore they can escape the hassle and expense of probate. They can also avoid the penalties of federal estate taxes.

For the grandchildren

The generation-skipping trust is a way for an individual with significant assets to provide for their descendants without triggering federal estate taxes. (Tennessee ended its inheritance tax in 2015.)

In a generation-skipping trust, the grantor leaves assets to their grandchildren, skipping their children’s generation. In so doing, it never triggers the federal estate tax.

Learn about your options

Over the years, Congress has revised the laws around generation-skipping trusts and estate taxes many times. Today, generation-skipping trusts do not necessarily escape taxation. However, the rate at which federal estate taxes kick in is now so high ($11.2 million for individuals) that it affects relatively few estates.

Estate planning attorneys talk to clients about all their options for protecting their wealth and providing a legacy for their loved ones and favorite charities. Trusts are not only powerful, but also highly adaptable, and can be tailored to clients’ specific needs and those of their families.