What is a Generation Skipping Trust?

A generation skipping trust is a trust that permits the wealth and estate of the grantor to be passed down to grandchildren rather than directly to the children. The main benefit of such an arrangement is that it provides tax relief for future generations, since the wealth of the trust is taxed just once when it is transferred to the grandchildren.

In addition, an exemption allows the grantor to place a certain amount in the trust that is not taxable — the maximum limit is subject to change by law. Children of the grantor may have access to income from the trust to ensure that they benefit from this arrangement as well. Safeguards built into a generation skipping trust ensure that the assets are not subject to unpredictable circumstances that might befall the beneficiaries.

When wealth is passed from a parent to a children, it is subject to estate and gift taxes at the time of the parent's death, and would be further depleted by taxes if it is passed on again. By setting up a generation skipping trust, those taxes would only be levied once when the wealth is passed on to the grantor's grandchildren. This helps to ensure that an individual's wealth survives to future descendants beyond his children.

This type of trust is subject to the Generation Skipping Transfer Tax, which was enacted by the United States in a 1976 law and modified in 1986 in an effort to prevent such trusts from containing limitless funds that are free from taxes. The law does contain an exemption that allows for a certain amount to be allowed into the trust that is not taxable.

Children of the grantor need not be excluded from the benefits of a generation skipping trust. Although they are not the beneficiaries, they can be allowed access to income earned by stocks or other assets within the trust. In this way, the children can benefit from the trust without the tax burden.

Another main benefit of a generation skipping trust is that the wealth is protected from any possible financial predicaments of future generations. For example, a child or grandchild of the grantor may fall into debt or go through a divorce in which the ex-spouse is owed a substantial amount of money. While the descendant can use his predetermined allotment of the trust to help with these circumstances, the trust itself is protected from any possible creditors.