Generation-skipping trusts (GSTs) are estate planning tools that transfer assets directly to grandchildren or later generations, skipping the trust creator’s children.
Contrary to popular belief, GSTs are not only for wealthy families. Regardless of your economic status, a GST may be beneficial. Here’s why.
The benefits of generation-skipping trusts
GSTs can help avoid estate taxes at each generational level. For wealthy families, the primary purpose is to preserve family wealth over multiple generations by minimizing tax liabilities.
Generally, assets in a GST also have protection from creditors, divorcing spouses or other potential claims against beneficiaries.
However, GSTs are not only for the rich who want to avoid estate taxes. Here are other practical reasons to create GST, regardless of your wealth:
- Control over asset distribution: Like other trusts, a GST allows you to set specific terms for when and how your grandchildren will receive the assets. For example, you can include a provision stating that your grandchild will only receive distributions once they reach a certain age or achieve a specific milestone.
- Special needs planning: If you have grandchildren with special needs, a GST can help ensure long-term care and financial support without jeopardizing their eligibility for government benefits.
- Skipping irresponsible children: Concerns about your children’s financial responsibility, addiction issues or vulnerability to creditors can be enough reason to set up a GST. Skipping their generation can help preserve your assets and ensure your grandchildren will have financial security.
- Flexibility: GSTs offer a lot of flexibility for changing circumstances. This is especially important since your grandchildren’s futures may be too far ahead to plan for using other legal instruments.
These are not the only benefits GSTs can offer. If you are unsure whether a GST is right for you and your family, consider consulting an estate planning attorney who can help you make the best choice.
The potential cons of generation-skipping trusts
While GSTs can be extremely useful, they are not without possible drawbacks. For one, skipping a generation can cause family conflict. Even if your children benefit from trust income, they might feel insulted if they do not have control over the trust itself.
Furthermore, most GSTs are irrevocable. This means you cannot change the terms or take back assets once you create the trust and fund it.
With all this in mind, it is crucial to plan your GST carefully before making it official. Consider all aspects of your family situation, your long-term goals and most importantly, your descendant’s futures.