When it comes to estate planning, a generation-skipping trust (GST) can be a valuable tool. It makes it possible to pass wealth directly to younger generations, typically your grandchildren, skipping over your children. This strategy offers significant benefits, especially in protecting assets across generations and reducing estate taxes.
What is a Generation-Skipping Trust?
A generation-skipping trust (GST) is a type of irrevocable trust that enables assets to be passed directly to beneficiaries who are two or more generations younger than the person who created the trust.
For example, rather than leaving assets to your children, you could direct them to your grandchildren or even great-grandchildren. The key advantage of this strategy is how it bypasses estate taxes that would otherwise apply to your children when they inherit the assets.
The GST strategy can be particularly effective in reducing the estate tax burden, as assets transferred to younger generations are subject to lower tax rates. For this reason, it’s an ideal option for individuals looking to preserve their wealth across generations.
How Does a Generation-Skipping Trust Work?
To set up a generation-skipping trust, the grantor (the person creating the trust) transfers assets into the trust, which is then managed by a trustee. The assets are allocated to beneficiaries who are a minimum of two generations younger than the person creating the trust.
The trust is managed according to the terms set by the grantor, who can specify how and when the assets are to be distributed. For example, the grantor can choose to have the trust assets distributed periodically or after a certain event, such as the beneficiary reaching a specific age.
Once the assets are placed into the trust, they are no longer part of the grantor’s estate. This means that the assets are not subject to estate taxes upon the grantor’s death. However, there may be generation-skipping transfer (GST) taxes if the amount transferred exceeds the GST tax exemption limits.
Benefits of a Generation-Skipping Trust
Estate Tax Savings
The primary benefit of a generation-skipping trust is the reduction in estate taxes. By transferring wealth directly to grandchildren or other younger beneficiaries, the assets bypass the estate tax that would apply if they were passed to your children. This can significantly reduce the tax burden on your estate and allow you to preserve more wealth for future generations.
Wealth Preservation Across Generations
A GST makes sure that your wealth remains within your family, passing down through generations without being depleted by estate taxes. This can be especially important for high-net-worth families who want to protect their assets and make sure they benefit multiple generations.
Asset Protection
Assets placed in a generation-skipping trust are typically protected from creditors and lawsuits. This means that if the beneficiaries face financial difficulties in the future, the assets in the trust are generally protected. As a result, the wealth can be preserved and remain available for the beneficiaries’ long-term benefit.
Control Over Distributions
With a generation-skipping trust, you can set specific terms for how the assets are distributed. This approach allows you to control how the funds are distributed to beneficiaries. You can specify certain ages or purposes for distribution, making sure your intentions are clearly followed.
Potential Drawbacks of a Generation-Skipping Trust
Generation-Skipping Transfer Tax
The IRS imposes a generation-skipping transfer tax on any amounts that surpass the GST tax exemption. As of 2025, the exemption is the same as the estate and gift tax exemption, which is $13.99 million for individuals. Any transfer above this amount may be subject to a 40% tax. This can reduce the effectiveness of the strategy for larger estates.
Irrevocability
Once assets are transferred to a generation-skipping trust, the grantor cannot change the terms of the trust or reclaim the assets. This can be a disadvantage for individuals who may want more flexibility or to alter their estate plan in the future.
Complexity and Costs
Creating and overseeing a generation-skipping trust can involve intricate steps and careful management. It often requires the help of a legal or financial professional to make sure that the trust is properly structured and compliant with tax laws. Additionally, there are administrative costs associated with maintaining the trust over time.
Why a Generation-Skipping Trust Might Be Right for You
A generation-skipping trust can be a smart choice if you are looking to lessen estate taxes and offer financial security for future generations. It is particularly beneficial for individuals who have significant wealth and want to make sure that it is passed down without being eroded by taxes.
If you have substantial assets and wish to protect your wealth while keeping control over how it is distributed, a generation-skipping trust comes with several advantages. If you are concerned about estate taxes or want to make sure that your grandchildren benefit from your wealth, this trust can be an ideal option.
How Nevada Trust Company Can Help
Nevada Trust Company provides estate planning services that include the creation and management of Nevada asset protection trusts and self-directed IRAs. Our team can assist in setting up a generation-skipping trust that helps reduce your estate tax burden and makes sure that your assets are protected for generations.
We also offer custody and escrow services to safeguard your wealth and manage your investments according to your specific needs.
