In order to keep wealth in the family, some high net worth individuals create generation skipping trusts, which pass assets to grandchildren and other younger family members without being taxed. A generation-skipping trust essentially doubles the amount of tax-free assets you can leave your beneficiaries. However, there are strict age-limit requirements for generation skipping trusts, as well as tax exempt limitations on how much you can leave the “skip person.” The attorneys at Strategic Counsel Law Group, L.C. specializes in all aspects of estate planning, including wealth preservation for the next generation and beyond.
How a Generation-Skipping Trust Works
While the “skip person” or beneficiary of a generation-skipping trust (GST) does not have to be a grandchild, for simplicity’s sake, in this scenario the relationship between the three generations in question shall be the grantor, the grantor’s child, and the grantor’s grandchild. As such, the following is a brief explanation of how a generation-skipping trust works:
- The grantor creates the irrevocable generation-skipping trust and funds it.
- The grantor passes away. They are free to leave up to $12.06 million to their children or other beneficiaries ($24.12 million for a couple) tax-free. These assets do not include those in the GST.
- The skipped person (the grantor’s child) can earn income from the principle in the GST as long as the original principle is left in the trust for the grandchild.
- The grantor’s child passes away. Now, the grandchild can have access to the assets within the GST. As long as those assets are worth less than $12.06 million, they do not have to pay generation-skipping trust transfer taxes.
Generation-Skipping Trust Transfer Tax (GSTT)
The generation-skipping trust transfer tax is a flat rate of 40 percent. Assets over the $12.06 million threshold will be taxed. However, only the excess is taxed; for example, if the assets in a GST are worth $13 million, only $940,000 of that is subject to taxation (the total tax burden would be $376,00).
Age Requirements of a Generation-Skipping Trust
In order to receive the estate tax break that a generation-skipping trust provides, the person or people the grantor names as beneficiaries must be at least 37.5 years younger than them. They do not need to be a grandchild or even a great grandchild. A grantor can leave any family member or non-related individual assets in a generation-skipping trust so long as the age gap is at least 37.5 years (and they are not a spouse or ex-spouse).
Call a Generation-Skipping Trust Attorney Today
Generation-skipping trusts are a valuable legal tool for high net worth individuals seeking to maximize the amount of property they leave behind for their loved ones. Because of the many intricacies of the tax code and how it applies to generation skipping trust and other irrevocable trusts used for reducing one’s taxable estate, it is highly advisable that you work with an experienced generation-skipping trust attorney. Call Strategic Counsel Law Group, L.C. today at 813-286-1700 to schedule a free consultation.
