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What is a Generation Skipping Trust?

Estate Planners | Monday, January 31st, 2011

A generation skipping trust is not just designed for the elite or wealthy. This type of trust provides a great way to safeguard any family’s assets from excess tax, creditors and ex-spouses looking for their “share” of the estate, just to name a few. The generation skipping trust also protects assets that might grow with time, like stocks.

Benefits of Generation Skipping Trust

A generation skipping trust is a good choice for wealthier families to be able to transfer their assets from the older generation to their grandchildren or great grandchildren without making their assets vulnerable to estate or so-called death tax. This is often the best option when the grantor’s children are financially comfortable and the grandparents want to provide for their grandchildren and great-grandchildren instead of bequeathing all of their assets to their surviving spouse and children. After all, in the long range scheme of things, these assets will likely be distributed to the grandchildren and great-grandchildren eventually, albeit quite a number of decades into the future. In this way, the generation skipping trust allows for all descendents to benefit the most from assets in the trust without the harsh imposition of estate or death tax when the children die, and then again when the grandchildren pass away.

You Don’t Have to Be “Rich”

While some types of trusts seem to be designed just for the super-wealthy, you don’t have to be “rich” in order to benefit from a generation skipping trust. Let’s assume that a child in the second generation has gone through a less than amicable divorce. Because the assets in the generation skipping trust won’t legally belong to the ex-spouse, the divorcing spouse will never be able to claim a share of the trust’s assets. In the same way, if a child starts a company and the company later goes under, the assets in the trust cannot be tapped into to pay the debts of the child as the child does not own the assets. Other financial catastrophes that might occur, like an uninsured car accident or a large gambling debt, would also not affect the trust. For a child that might be a spendthrift, this trust will allow the child to have access to trust assets but not in control over the timing of distributions of those assets.

Generation Skipping Trust Limitations

A generation skipping trust can only go so far to protect an estate. The limit that can be transferred into this type of trust is $2 million per person that can be left in the trust. The generation skipping trust can be created at any time during one’s lifetime, and lifetime transfers to that trust can be made in amounts up to $1 million. Any type of asset that has the potential to grow appreciably is a good candidate for a generation skipping trust. Assets such as stock are perfect for this type of trust because the trust is not taxable. Likewise, life insurance policies are often safe in a generation skipping trust.

Some professionals request that their parents put their estates into a generation skipping trust. For example, a doctor who has an enhanced risk of liability may see the generation skipping trust as a way for their parent’s estate to be protected from creditors while the assets are still available to him.

If you believe the generation skipping trust may be right for you, discuss your concerns with an estate planner.

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