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What’s a Generation Skipping Trust?

A generation skipping trust is a device that allows you to pass wealth across generations free of estate and other transfer taxes.  When your children are well-established financially, it may be wise to set aside all or part of their legacy in a trust where the permissible beneficiaries are both your children and their children (your grandchildren).  Trust assets can then be used for the benefit of your children, if needed, or to pay higher education and similar expenses of your grandchildren, or can be set aside to be used for other financial goals.  The assets remaining in the trust at the death of the children will be held in further trust for the benefit of your grandchildren, but the generation skipping trust protects the trust assets (including all growth on the assets) from being subject to transfer taxes in the children’s estates, thus ensuring that your grandchildren get the most out of the inheritance.

Properly drafted generation skipping trusts can be beneficial in a number of situations, such as when a child endures a difficult divorce. Because funds in the trust will not be subject to equitable distribution in the divorce, they will ultimately pass to the grandchildren and completely bypass the ex-spouse. If a beneficiary incurs debts, their creditors cannot tap into the inheritance to pay for them. Unforeseen hardships may also arise, but the money in the trust will be safely kept for your family members, so that you may help them plan for and build a strong future even after you’ve passed on.

Life insurance policies and stocks are ideal assets to fund a generation skipping trust. Not sure about other assets that may be used to fund this type of trust? To consider your options for a generation skipping trust, contact the Estate and Tax Planning team at Certilman Balin and we’d be happy to help answer any of your questions as well as give you guidance in setting up this type of trust as part of your estate planning.