An estate plan serves multiple purposes, but one of its primary aims is the protection of your assets. Therefore, a comprehensive plan will use various tools to preserve more of your wealth for future generations.
Part of wealth preservation is lowering your tax bill so you can keep more of your hard-earned assets. How can a generation-skipping trust help with that?
How does a generation-skipping trust work?
A generation-skipping trust (GST) allows you to pass your wealth directly to your grandchildren, skipping over your children. This prevents subjecting your estate to taxes that would be incurred by your estate going directly from one generation to the next.
A GST doesn’t necessarily exclude your direct heirs. They can still receive the benefits of those assets during their lifetime, but legal ownership would be in your grandchildren’s hands. Since the trust is designed to skip a generation, it eliminates the need to pay taxes twice – from your estate to your children, then from your children to theirs. Through the elimination of double taxation, more wealth is preserved.
In addition, transferring your assets into a GST can help keep your estate from going through probate, which saves both time and money for your heirs.
There is one important consideration when creating a GST. The federal generation-skipping transfer tax (GSTT) seeks to prevent what most people wish to accomplish – avoiding a large tax bill. However, there is a $13.99 million threshold for each beneficiary ($27.22 million for couples). As long as the trust assets are under the threshold, the GSTT won’t apply.
It’s also essential to understand that any assets transferred into the GST count towards your lifetime gift tax exemption. And while it is currently at $13.99 million, unless the Tax Cuts and Job Act of 2017 is extended, it could fall back to $7 million in 2026.
Creating a GST is complex. Therefore, you will need guidance from someone who can ensure it’s set up to take advantage of the exemptions and preserve your wealth for many generations to come.
