What is the generation-skipping trust?

As we have discussed previously on this blog, there are many estate planning vehicles that can be utilized to dictate how an individual's assets will be distributed upon his or her death. While wills are quite common, trusts can, in some instances, be much more effective when used in combination with a will. There are a wide variety of trust types available to estate planners, each serving its own purposes and carrying its own benefits. Knowing the ins and outs of each trust is critical to developing a holistic and effective estate plan.

One type of trust that an individual may consider is the generation-skipping trust. Here, as its name implies, assets are placed into a trust for the purpose of passing them down to an individual's grandchildren, rather than his or her children. With that being said, the generation-skipping trust does not have to name a blood relative as the beneficiary. Instead, the beneficiary only needs to be 37 1/2 years younger than the individual who created the trust.

But, why would an individual create a generation-skipping trust? The biggest benefit of these types of trusts is the fact that they can allow an individual's children to avoid estate taxes from inheriting a parent's estate. Since the new tax law increased the amount of assets that are exempt from estate taxes, these types of trusts are generally only utilized by those with high net worth. Even though the estate in a generation skipping trust is passed over an individual's children, those children can still receive any income that is generated from the trust. So, depending on an individual's situation, the generation-skipping trust may prove beneficial.

This type of trust is highly specialized, which, as we have indicated before, is one of the great things about estate planning. There are a great number of estate planning options they can be used to create a custom-tailored approach to fit an individual's vision for his or her estate and the future of his or her loved ones.

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