Do I Need a Generation-Skipping Trust? 

A Generation-Skipping Trust is an estate planning tool designed to help avoid estate taxes at different generational levels. However, use of this type of tool may subject your estate to other taxes commonly known as “generation-skipping transfer taxes.” My intention is to help you understand the reason behind these taxes, and whether you might be subject to them.

Essentially, the policy supporting this tax is the belief that a family’s wealth should be passed from one generation to the next in a manner that ensures each generation pays estate taxes every time the inherited wealth is passed down. At some point, some clever lawyer realized that if a wealthy individual were to pass his or her inheritance with a gift from grandparent to grandchild (called a direct skip) or by using a generation-skipping family trust that provides successive generations some but not all beneficial use of trust property such that the property is not included in their taxable estates, the individuals’ descendants could avoid estate taxation and keep more wealth within the family. Of course, the government caught on to these loopholes and implemented a taxation plan called the “generation-skipping transfer tax.”  

Before you go running out to establish a Generation-Skipping Trust, you should evaluate whether estate taxes are likely to be a concern based on the size of your estate, current exemption limits, and your intended beneficiaries. For the generation-skipping transfer tax, you should be aware that it not only applies to grandchildren and other family members but also includes nonrelatives who are at least 37.5 years younger than the testator. However, there is a general exemption from the generation-skipping transfer tax equal to the unified gift and estate tax exclusion amount, so this tax should not be a concern for individuals with smaller estates. When it is a concern, the fiduciary responsible for administering the estate should seek advice in order to figure out the best way to allocate the generation-skipping transfer tax exemption to specific assets.

Generation-skipping issues can get very complicated. An experienced and competent estate planning attorney should be consulted to determine whether a Generation-Skipping Trust is appropriate for you. This blog provides a general overview based on current law. Each individual estate planning situation requires an independent analysis of the specific facts and circumstances involved. [Disclaimer]

Our estate planning team at Naimish & Lewis can advise you on estate planning, trusts and estates administration, and probate related matters such as probate administration, conservatorship and guardianship. To schedule an initial consultation with an attorney at our firm, please contact us