A generation skipping trust is a type of irrevocable trust. It can be a useful estate planning tool for those with large estate. In this article, we will go over the basics of how a generation skipping trust works.
How It Works
A generation skipping trust allows you to bypass your children as beneficiaries and pass trust funds on to your grandchildren. Beneficiaries can qualify as long as they are 37 ½ years younger than you and not a spouse or ex-spouse. Even though your children are not the main beneficiaries of the trust, you can allow them to access the income that the trust generates.
Previously, people would use this trust because it would allow them to avoid estate taxes. Now there is a generation skipping tax of 40% to close that loophole. If your funds pass the $11.7 million estate tax threshold, trust distributions will be subject to a 40% estate tax and a 40% generation skipping tax.
Even though generation skipping trusts no longer avoid estate taxes, they still offer many benefits. First, it is a way you can preserve your family wealth for at least two generations. Second, it allows you to avoid double estate taxation. If you pass funds on to your children, they can be taxed at that time and then again when your children pass those funds on to your grandchildren. Lastly, by keeping the excess funds it can protect your children’s estates from surpassing the $11.7 million threshold. Thus, helping to preserve their estate.
There are some important considerations you need to take into account before setting up a generation skipping trust. First is the generation skipping trust could be subject to a 40% generation skipping tax and a 40% estate tax. Second, there is an administrative burden involved in administering the trust.
Setting up a Generation Skipping Trust
If you feel that a generation skipping trust is right for you, you will want to meet with an estate planning professional who can help you complete the trust.
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