Hyden, Miron & Foster, PLLC Law Blog

Saturday, March 30, 2019

What Can a Generation Skipping Trust Do For You?

Estate planning for wealthy individuals often involves using a variety of trusts to protect assets and avoid tax liabilities. However, trusts can be beneficial for anyone seeking to avoid probate, reduce tax liability, and protect assets. One type of trust that many families use to leave a legacy to future generations is a Generation Skipping Trust.

If you are interested in including a Generation Skipping Trust or another trust in your estate plan, an Arkansas estate planning attorney can provide guidance and suggestions as you develop an estate plan that protects you and your heirs.

What is a Generation Skipping Trust?

A Generation Skipping Trust (GST) allows grandparents to leave money or assets to their grandchildren to avoid paying estate tax twice. If a parent leaves property directly to a child, the inheritance is subject to federal estate tax if the value of the inheritance exceeds the estate tax exemption. If the parent then leaves the same assets to his or her children, the assets are subject to federal estate tax again if the value exceeds the estate tax exemption.

By using a GST, grandparents can leave assets and property to grandchildren and future generations so that the inheritance is not subject to estate tax twice. A GST may also leave name unrelated individuals who are at least 37½ years younger than the grantor as the trust’s beneficiaries.

What are the Advantages of Using a Generation Skipping Trust?

A grantor can leave assets and property to their grandchildren, great-grandchildren, and other generations. When drafted correctly, a GST could provide income for future generations for several decades. Because the assets are held in a trust, they are protected from legal action against the heirs. The trust protects the assets from a variety of financial mishaps including bankruptcy, divorces, medical bills, debts, and failed businesses.

A grandparent who wants to ensure that grandchildren have access to assets and income that can pay for a college education, help purchase a first home, or assist in starting a business can use a GST. Because GST gives the grantor a great deal of flexibility in how and when distributions from the trust may be made to beneficiaries, the grantor can even protect a grandchild from squandering his or her inheritance during their twenties or thirties.

Disadvantages of a Generation Skipping Trust

There are some disadvantages of using a GST as part of your estate plan. A GST is an irrevocable trust. Therefore, once the grantor funds the trust, the grantor cannot change the terms of the trust or remove the assets. However, because GSTs are flexible, a grantor can make sure that the terms of the trust allow for some flexibility in the future to maximize the trust’s benefits.

Beneficiaries may owe federal taxes on any amount exceeding the tax exemption for generation-skipping transfers of wealth. The GST tax or generation-skipping transfer tax is intended to “catch” and tax transfers of wealth that would otherwise avoid being taxed.

Contact an Arkansas Estate Planning Attorney for More Information

GSTs and other trusts can play important roles in a comprehensive estate plan. However, because of the potential tax liability and the complexities of Generation Skipping Trusts, it is best to consult an experienced Arkansas estate planning attorney before drafting and funding a GST. Schedule a consult with one of our estate planning lawyers to help you draft the GST to maximize its benefits and avoid the disadvantages whenever possible.


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