Many people choose to leave their assets to their children when they die. However, some families looking to protect generational wealth may decide to create a generation-skipping trust (GST).
Your children can still benefit from the trust during their lifetimes, but the assets themselves will ultimately pass to the younger generation. Why would someone choose to bypass their direct heirs?
Long-term planning
Assets are usually taxed when they pass from a parent to a child. A GST can help to reduce or eliminate the federal tax on those assets. By skipping a taxable transfer to the middle generation, more of your wealth stays in the family. A properly structured GST can help shield your estate from avoidable taxes.
GSTs can also protect family wealth from creditors and ex-spouses. The assets are not owned outright by the beneficiaries, but by the trust itself. This means they are not subject to divorce settlements, lawsuits or creditor claims.
You can retain some control over your wealth with a generation-skipping trust. You can set detailed terms for how the assets are managed and distributed. For example, you can limit distributions to education, healthcare or other approved purposes. Appointing a professional trustee helps to ensure responsible oversight. This is especially useful since younger beneficiaries may not have the emotional or financial maturity to manage a large inheritance wisely.
While the GST ultimately benefits the grandchildren or later descendants, it doesn’t mean that your children are left out. You can structure the trust so they receive income from it or could access the funds for major needs (approved by the trustee), while leaving the principal untouched for the next generation.
A generation-skipping trust may be a good option if you have significant assets you want to pass down for several generations. A legal representative can tailor the trust to fit your goals and address your long-term priorities. The planning can be complex and must follow specific IRS rules to qualify for the tax benefits, so you will need someone to ensure the trust is drafted correctly.
