We’ve all heard the saying, “The only things certain in life are death and taxes.” But what’s truly unfortunate is there are taxes after death!
However, there are some trusts that can reduce the tax liability for your beneficiaries.
What is a generation-skipping trust?
A generation-skipping trust (GST) is an estate planning tool that wealthy individuals use to pass assets onto later generations and reduce their tax liability. It effectively skips the grantor’s children and goes to their grandchildren. However, the grantor’s children can receive the income generated by the trust’s assets.
There are several reasons why someone may choose to establish a GST. One of the primary benefits is the tax advantages. There are often significant tax liabilities when assets are passed from one generation to the next. A GST bypasses those estate taxes and preserves more of the family’s wealth for future generations.
Assets placed within a GST are protected from beneficiaries’ creditors, legal judgments and divorce settlements. This ensures that more wealth stays within the family. The grantor also has flexibility in determining how and when the assets are distributed. The terms can be tailored to meet specific objectives, such as education or entrepreneurial ventures.
While GSTs are beneficial for long-term wealth preservation and establishing a lasting legacy, there are some potential drawbacks to consider. It could create family conflict if the immediate generation feels overlooked. It’s important to clearly communicate your intent and ensure your estate plan is inclusive.
Setting up a GST can be complex and requires careful planning. It also requires an understanding of tax laws and the Generation-Skipping Transfer Tax (GSTT), a federal tax on assets transferred to the second generation and beyond. Understanding exemptions and how they can be strategically managed to avoid unexpected liabilities is imperative.