Generation-Skipping Trust

Generation-Skipping Trust

A generation-skipping trust is a revocable trust that contains specific provisions designed to take advantage of the generation skipping tax exemption.

Generation-Skipping Tax, or GST, is a tax created to close a loophole that wealthy families once exploited. The concept behind generation skipping trusts is to avoid estate tax upon the death of a trust beneficiary. Instead of Grandpa passing his assets to his children (incurring estate tax) who will eventually pass the same assets to their children (incurring estate tax a second time), Grandpa would pass his assets directly to his grandchildren, thereby "skipping" a generation's worth of estate tax. Often, the children would have some benefits to the "skipped" assets during their life, but not enough benefit to result in a tax.

To close this loophole, the Internal Revenue Service created the "Generation Skipping Tax" which taxes any generation skipping transfer at the highest rate of estate tax. However, the IRS grants each person a lifetime exemption from this tax.

Since the only thing worse than dying, is dying without using your tax exemptions, I recommend generation skipping tax provisions for all clients with significant wealth.