Generation Skipping Trusts Explained

Generation Skipping Trusts Explained

A generation-skipping trust (GST) is an irrevocable trust with designated beneficiaries who are, at least, 37.5 years younger than the grantor and may, or may not be related to them. GSTs are used by higher net worth individuals and families to pass on wealth to a younger generation and avoid double taxation of their estate.

To avoid double taxation, the grantor will develop a generation-skipping trust to pass wealth directly to the grandchildren or designated generation skip. The grantor will relinquish ownership of the assets contained in the trust. The typical direct beneficiary: the grantor’s child, is not liable for taxes from the estate, as they do not own the assets. The designated skip beneficiary owns the assets and pays taxes on them when they inherit the trust assets. Therefore, the estate tax is paid only once, across three generations.

How it Works

The annual exclusion amount for generation-skipping trusts is $12.06 million per person in 2022. This is the total amount of property that an individual may pass to any one person through lifetime gifting or trusts without the imposition of taxes. No rule prohibits the skipped generation from accessing earnings on assets, so long as the original assets remain in the trust for the beneficiary and are not disturbed. Assets can only be released to the designated beneficiary.

Benefits and Comparisons

Generation-skipping trusts are similar to dynasty trusts in that both are implemented to pass on wealth between generations. GST and dynasty trusts are similar in design to help avoid estate taxes. Each trust may be customized to benefit or restrict beneficiary access. GST trusts may also allow a grantor to provide for the immediate generation, with regular income allowances, and rent-free stays.
Generation-skipping trusts, however, are limited in the window to pass on wealth to a person or relative who is 37.5 years younger than themselves.
In contrast, dynasty trusts enable the passage of wealth between multiple generations. For example, the grantor can pass on wealth to an immediate beneficiary who can, then, pass on wealth to their direct offspring.

Irrevocable or Revocable?

A generation-skipping trust is an irrevocable trust. This means the trust cannot be changed or revoked. GST trusts require careful consideration when implementing This provides extra protection of your trust but still allows you to have the ability to build in provisions and still be able to determine how the estate is invested, and how assets are distributed.

Contact Us

A generation-skipping trust is a complicated legal entity, therefore, it’s a good idea to consider this financial instrument as early as possible — ideally when you begin planning for retirement. It is best to work with a team; including a qualified estate planning attorney, estate planner, and accounting professional. Contact our accountants today by filling out our contact form.

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