What Is a Generation-Skipping Trust?

A generation-skipping trust is a way to leave a large amount of money for a family member who is at least 38 years younger than you. These types of trusts are most common in situations where grandparents leave their grandkids money, hence the term “skipping,” which refers to skipping one generation and leaving money for the next. This type of trust can also be done in other instances. For example, someone could leave a generation-skipping trust for their great-niece, great-nephew, great-grandkid, or even someone not related.

It’s important to keep in mind that since these types of trusts can be somewhat complicated, you should start the process of creating a generation-skipping trust as soon as you start planning your retirement. That way, you’ll be ahead of the curve when it comes time to finalize all of your finances for your twilight years.

Below, we explore a few of the benefits and drawbacks of generation-skipping trusts.

Benefits

Generation-skipping trusts have a few benefits. The first being that these types of trusts are a great way for your beneficiaries to avoid taxes on the money they receive from you when you pass away. While some states don’t have an inheritance tax, the federal government still regulates the money that family members inherit. However, with a generation-skipping trust, there is a possibility that the money could be passed on tax-free. How could this possibly work? Well, there are a few different ways. For example, if a grandparent leaves money for their grandchildren, once the grandparent passes away, the ownership of the money is then passed on to the parents (the skipped generation). Once the parents pass away, the grandchild is then transferred the money without any tax implications.

An additional way for taxes to be left out of a generation-skipping trust is for the amount to be too low for taxes to apply. As of 2020, this threshold is $2,600 or less.

Another benefit of generation-skipping trusts comes in the form of legacy. If you’re concerned that you may not be able to be there for every moment of your grandchild’s life, a generation-skipping trust can be a great way to leave behind a legacy. While your grandkids may not realize it at first, they will soon recognize the kind of benefit you provided them. This is especially true if the money left behind can help with major expenses like education, cars, or houses.

Drawbacks

Unfortunately, like any type of financial plan, generation-skipping trusts have a few disadvantages. The first drawback is the age gap policy. While it is rare that grandparents are less than 38 years older than their grandchildren, it has happened in some instances. But, more noticeably, this age gap can withhold people from leaving trusts for younger adults that they view as non-biological grandkids. For example, if you’re 70 years old, you would not be able to leave a close, family-like 35-year old a generation-skipping trust. While you can leave them money in a will or standard trust, it could be taxed at a much higher rate.

Another con of generation-skipping trusts is the lack of regulations against access. If you decide to leave a trust for your grandkids, there’s nothing in place that dictates how the money is used. This can lead to the parents using the money before the kids are old enough to realize that they have a large sum of money in their name. This is why it’s important to notify the parents or guardians that you want the trust to be used in a specific manner. While it doesn’t control how they will use the money, it does give them a chance to honor your request.

Plan Your Family’s Legacy Today

At Bridges, Jillisky, Streng, Weller & Gullifer, LLC, our team is here to assist you with any will, trust, or estate planning needs. It’s important to make sure your loved ones are covered for the future. For more information regarding generation-skipping trusts or any other legacy plans, contact us today!