There are dozens of trusts that can be used to shelter assets and reduce taxes.
Today, we’ll review the generation-skipping trust (or GST).
What is a generation-skipping trust?
A generation-skipping trust (GST) is an irrevocable trust established for a beneficiary who is at least 37 ½ years younger that the grantor. The beneficiary can be any person, except for a spouse or ex-spouse, as long as they meet the age requirement.
An irrevocable trust is one that can’t be changed once established without the permission of the beneficiaries. The grantor of the trust gives up ownership of the assets once placed in the trust.
Who might benefit from a generation-skipping trust?
If you have a very large estate, a generation-skipping trust allows you to reduce your estate’s tax liability.
Let’s say you have a daughter, and she has a daughter. If you pass your estate to your daughter, and then she passes to her daughter, the estate tax would be levied twice—once per transfer. A generation-skipping trust passes the assets directly to your grandchildren (or other beneficiary who is at least 37 ½ years younger than you). This means your estate avoids the extra layer of estate taxation that would have been assessed if your estate first passed to your children.
Speaking of your children—assuming that your trust is established for the benefit of your grandchildren, they won’t pay taxes on it since they will never take possession of it. However, a generation-skipping trust may still allow your children earn income on the assets in it. You can effectively structure the trust to provide for multiple generations of your family, if you’d like.
Not only can a generation-skipping trust help your heirs save money on the federal estate tax, but also on the dozen states (plus Washington, D.C.) that also have their own estate taxes. Some match the federal exemption ($11.7 million in 2021), and others start at less than $1 million.
It’s important to note that the generation-skipping transfer tax of 40% still applies to assets that are distributed from a generation-skipping trust if they are valued at greater than the current federal estate exemption threshold. State inheritance or estate taxes still also apply to trust distributions.
In summary, a GST could be a great tool for you if you have a large estate and you have family or friends who are at least 37 ½ years your junior to whom you’d like to leave assets. But a generation-skipping trust isn’t something you can set up without guidance. These are complex estate-planning vehicles, and you’ll need help to set it up from someone with experience.
If you have questions about a generation-skipping trust or want to know more about estate and tax planning, click here to schedule a free meeting with a financial advisor.
Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k)administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.