What Is a Generation-Skipping Trust and How Can It Benefit My Family?

 Posted on July 20, 2020 in Estate Planning Blog

Generation-skipping trusts, also known as dynasty trusts, are a way of avoiding estate taxes on an individual’s property and assets after death. It is a legally binding agreement that skips the children’s generation and leaves the inheritance to the grantor’s grandchildren to avoid an estate being taxed twice. With a generation-skipping trust, the children can still access the funds to pay for education, health, maintenance, and support, but upon their death, it automatically goes to their children. Generation-skipping trusts are a type of irrevocable trust, which means they cannot be changed or canceled. For this reason, it is wise to speak with a knowledgeable estate planning attorney who can assist in creating the trust before attempting to do so yourself.

Who Can Be the Beneficiaries?

The fact that this type of trust is called a generation-skipping trust leads many people to believe that the only beneficiaries can be grandchildren. However, the trust can be set up for anyone who is 37.5 years younger than the grantor. If the beneficiary is not a relative, he or she is called a “skip-person.” According to Internal Revenue Code 2651, if the parents die before the grandchild, then the grandchild moves into his or her parent’s place in line and a generation-skipping trust is no longer applicable to them.

Tax Exemptions Associated with a Generation-Skipping Trust

According to Forbes, the Internal Revenue Service (IRS) announced the estate and gift tax exemption is $11.58 million per individual and $23.16 million per couple for 2020. Any estate worth more than these exemption amounts will be taxed at 40 percent federally. The Tax Cuts and Jobs Act, which went into effect in 2018, nearly doubled the exemption amounts. This act is set to expire at the end of 2025, at which point Congress will need to renew it for the exemptions to remain as large as they have been.

Other Ways to Spend Down Your Estate and Avoid Estate Taxes

Another way you can spend down your estate is by making gifts of cash or property to individuals. While you can make an unlimited number of gifts in 2020, each one must be capped at $15,000. These gifts apply toward the $11.58 million exemption before the assets begin to be taxed. You can also choose to donate to charities that you support. In addition to the generation-skipping trust, you may want to consider setting up a qualified personal residence trust or an irrevocable life insurance trust.

Contact a Lombard, IL Estate Planning Lawyer

If you do not plan for your estate, it can leave your assets exposed to high levels of taxation after death. It can also cause strain on family relationships while they try to manage the estate and divide it evenly. One way to avoid these problems is by setting up a generation-skipping trust. The skilled DuPage County estate planning attorneys at A. Traub & Associates have the experience to guide you to the solution that best fits your estate's needs. Contact us today at 630-426-0196 to learn more about generation-skipping trusts and begin your estate planning.

Sources:

https://irc.bloombergtax.com/public/uscode/doc/irc/section_2651

https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-estate-and-gift-tax-limits-for-2020/#7793cb4b2efb