Generation-skipping trusts are legal agreements that allow someone to distribute their assets to future generations, while bypassing their children’s generation. The name of a generation-skipping trust comes from the trust skipping the individual’s children and giving assets directly to grandchildren instead.
What is the Purpose of a Generation-Skipping Trust?
This can be an excellent way for wealthy individuals to pass assets down to their grandchildren, or even great-grandchildren, without heavy taxes. The main purpose of this tool is to give future generations income while reducing the tax burden associated with generational asset transfers.
How it Works
A generation-skipping trust is a complex legal tool where people can indicate that they want their assets to go not to their children, but instead to their grandchildren or great-grandchildren. This is usually done when the individual is confident that their children, who would be skipped in this arrangement, are well off financially. Otherwise, they can include provisions to give their children the right to distribution, which gives them access to those funds.
By providing funds to an individual’s grandchildren directly, it allows these funds to be taxed only once during the individual’s passing. Comparatively, if the individual were to pass these funds to their children, and then the children were to subsequently pass these assets on to their own children, the funds would be transferred twice and thus taxed twice. By skipping a transfer, it eliminates the double taxation that would otherwise occur.
Who Generation-Skipping Trusts Might or Might Not Benefit
This is a great option for wealthy individuals who are looking to protect their assets for years to come. Conversely, this may not be the best option for individuals with smaller estates or those who might want to have more assets distributed to their children first before grandchildren.
To determine whether a generation-skipping trust aligns with your goals, contact our estate planning attorneys today by calling 608-784-8310 or emailing us.