Generation Skipping Trusts, also known as GSTs, are an excellent estate planning tool created to avoid double estate taxation at the death of a grantor and the subsequent death of their children. Considering the potential changes in estate tax exemptions coming soon, this type of trust may become an increasingly useful tool in planning for and transferring wealth.

What is a Generation Skipping Trust and how does it work?
A generation skipping trust is a fiduciary agreement that moves assets to either the grantor’s grandchildren or an individual who is at least 37.5 years younger than the grantor. The trust earns its name because the grantor skips over their own children, passing the inheritance to their grandchildren. These irrevocable trusts enable the grantor to avoid potential estate taxes applicable to the children were they to take ownership of the assets. Irrevocable trusts may also provide additional asset and tax protection. It is important to note that even though GSTs may avoid estate tax, they may still be subject to a generation skipping transfer tax. The federal generation-skipping tax (GST) exemption is indexed for inflation and increased in 2024 to $13.61 million for individuals and $27.22 million for married couples. Grantors are entitled to a lifetime generation-skipping tax exemption up to that amount against the property transferred into the GST.

While the grandchildren may be considered to be the beneficiaries, there are no rules preventing the children of the grantor from accessing the earnings of the assets in trust. As such, the children cannot lose those assets in any legal action since they do not own the protected assets. While the children may still benefit from the earnings of the GST, their use of those protected assets is limited to the broad categories of their own health, education, maintenance, and support.

Benefits and Drawbacks
Generally, GST assets are not included in the child of the grantor’s taxable estate, lessening their exposure to the general estate tax. In addition, no double estate tax would be assessed as it would if the assets passed from grantor to the children, then to grandchildren. As mentioned, GST assets are protected from creditors of the grantor’s children. These trusts also ensure the grantor’s financial wealth will last for at least the next two generations of the family.

As with all things, there are drawbacks. If you have a particularly large estate, the generation skipping transfer tax may apply. GSTs, depending on their complexity, may also be costly to establish and to fund the administrative burden of running the trust.

Generation Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) was introduced in 1976 seeking to tax those assets transferred via a GST by applying a forty percent (40%) tax rate to the transferred assets. Prior to the now imposed transfer tax, wealthy individuals were able to avoid all estate taxes through the use of GSTs. However, even with the GSTT, there remains some relief as the Tax Cuts and Jobs Act substantially raised the threshold amount applicable to the value of the assets being transferred. For 2024, the threshold amounts are $13.61 million per individual and a combined $27.22 million for a married couple. Unfortunately, the threshold amounts are facing potential sunsetting in 2025 to the pre 2017 amounts adjusted for inflation.

There are many complexities surrounding generation-skipping trusts. RJS LAW’s experienced tax, trust, and estate attorneys are able to create a GST which will take full advantage of the generation skipping transfer tax lifetime exemption. For a no cost consultation, please contact us via the web at RJS LAW or by phone at 619-595-1655.

Written by Sean Erdman