Much estate planning revolves around providing an inheritance for a spouse or children. But for older family members who have large estates and grandchildren to think about, estate planning can become more complicated. Some Texas grandparents want to directly pass on inheritances to their grandchildren, which is one reason why people compose generation-skipping trusts.
The Motley Fool explains that a generation-skipping trust is used to pass along assets to a generation beyond children, typically to grandchildren, but can also convey inheritances to great-grandchildren or other young descendants like grandnephews and grandnieces. While some people use a skip trust for grandchildren only, it is not uncommon for family members to create skip trusts to pass assets to multiple generations.
Another reason people use generation-skipping trusts is to reduce the estate taxes paid on the money in the trust. While a generation-skipping trust can be taxed a second time after gift and estate taxes are taken care of, people can structure their trust so that the trust can take advantage of a lifetime exemption that stems from the generation-skipping transfer tax. Applying this exemption allows trust asset appreciation to be paid to beneficiaries without being taxed.
Sometimes a generation-skipping trust does not have to skip a generation. Forbes explains that a skipping trust can be composed so that the parents of grandchildren draw an income from the trust. The grandchildren will inherit the remainder of the trust when the time comes to receive their share. Setting up the trust in this manner can help the grandchildren and their parents receive an inheritance while avoiding estate taxes.
Generation-skipping trusts do possess some complexities that can be confusing, and if the trust is not composed correctly, it may not avoid all possible taxes. Families who seek to go down the route of using a skipping trust may find it preferable to seek professional assistance in crafting one.