What Is a Generation-Skipping Trust and Do You Need One?

Most people leave assets to their children. But what if you could pass wealth directly to your grandchildren and skip a round of estate taxes entirely? That is exactly what a generation-skipping trust does.

A generation-skipping trust (GST) is a legal arrangement that allows you to transfer assets to beneficiaries who are at least two generations below you, typically your grandchildren or great-grandchildren. The trust skips over your children's generation for estate tax purposes, which means the assets inside it may avoid being taxed twice before reaching your grandchildren.

Generation-skipping trusts are powerful tools for families who want to preserve and grow their estate across multiple generations. However, understanding the rules, benefits, and limitations is critical before deciding if this strategy is right for you. Here are five key things everyone should know about generation-skipping trusts.

1. How a Generation-Skipping Trust Actually Works

A generation-skipping trust works by holding assets in a trust structure and naming skip persons as beneficiaries. Skip persons are individuals at least 37.5 years younger than the grantor, typically grandchildren. Your children may still receive income from the trust during their lifetime, but the principal assets pass directly to your grandchildren upon your death or when the trust terms dictate. The trust itself owns the assets, which means those assets are not counted in your children's taxable estate when they die.

2. Who Benefits Most from a Generation-Skipping Trust

Generation-skipping trusts are not for everyone. They are best suited for specific situations and financial profiles. You may benefit most if:

• Your estate exceeds the federal estate tax exemption, currently over $12 million for individuals.
• You want to provide for your grandchildren without giving full control to your adult children.
• You own a family business or real estate you want to keep intact across generations.
• You have a child who struggles with financial responsibility and you want to protect inherited assets.
• You want to minimize estate tax exposure at multiple generational transfers.

3. The Generation-Skipping Transfer Tax Explained

The federal government created the generation-skipping transfer (GST) tax specifically to prevent families from avoiding estate taxes by skipping generations. The GST tax rate is a flat 40%, the same as the federal estate tax rate. However, each person has a GST tax exemption equal to the federal estate tax exemption, which was over $12.92 million as of 2023. Assets transferred into a generation-skipping trust up to this exemption amount pass free of the GST tax. Anything above the exemption is subject to the 40% tax. Proper planning with an estate attorney can help you allocate your exemption wisely.

4. Key Advantages of a Generation-Skipping Trust

A generation-skipping trust offers several important financial and legal benefits. Assets held in the trust are protected from creditors, divorce proceedings, and legal judgments that might affect your children or grandchildren. The trust can be structured to provide income to your children while preserving the principal for the next generation. Growth inside the trust is also shielded from additional estate taxes at each generational transfer. For families with significant wealth, this compounding tax savings can represent millions of dollars over time. The trust also gives the grantor control over how and when assets are distributed, adding an extra layer of protection.

5. How a Will Fits Into Your Generation-Skipping Strategy

A generation-skipping trust is a sophisticated estate planning tool that works best alongside a comprehensive will. Your will serves as the foundation of your estate plan and can direct assets into the trust at the time of your death. Without a valid will, your estate may pass according to state intestacy laws, which could completely bypass your carefully structured trust. A well-drafted will also appoints a trustee, names guardians for minor children, and ensures your overall wishes are honored. Even if a full generation-skipping trust is beyond your current budget or needs, having a valid will in place is the essential first step every adult should take. BudgetWills.com makes creating a state-specific, legally valid will simple and affordable, giving you a strong foundation to build on as your estate plan grows.

The Big Question: Should You Set Up a Generation-Skipping Trust?

A generation-skipping trust is one of the most effective wealth-preservation tools available, but it is primarily designed for high-net-worth individuals with estates exceeding the federal exemption limits. For most families, the cost of drafting and administering a GST through a traditional estate attorney can reach tens of thousands of dollars. The smart approach is to start with a solid, legally valid will that protects your family right now. A will can always be updated as your estate grows, and it is far better to have something in place than nothing at all. Skipping a will while waiting to set up a more complex trust is a mistake that can cost your family dearly.

BudgetWills.com makes it simple to create a legally valid, state-specific will for just $49.95. You can complete your will from home in minutes, download it instantly, and have peace of mind knowing your wishes are protected. Visit BudgetWills.com today, choose your state, and take the most important step your family deserves.