BROWSE

Generation-Skipping Trust

What is a 'Generation-Skipping Trust'

A generation-skipping trust is a type of legally binding trust agreement in which the contributed assets are passed down to the grantor's grandchildren, not the grantor's children. The generation to which the grantor's children belong skips the opportunity to receive the assets to avoid the estate taxes (taxes on an individual's right to transfer property upon his death) that would apply if the assets were transferred to them.

Explaining 'Generation-Skipping Trust'

Because a generation-skipping trust effectively transfers assets from the grantor's estate to his grandchildren, the children of the grantor never take title to the assets. This is what allows the grantor to avoid the estate taxes that would apply if the assets were transferred to his children first. The recipient of a generation-skipping transfer doesn't necessarily have to be a family member; the beneficiary can be anybody other than a spouse or ex-spouse, as long as the beneficiary is at least 37.5 years younger than the grantor. Generation-skipping trusts are effective tools of wealth preservation for individuals with significant assets and savings; 2016 estate taxes in the U.S. range from 18 to 40%, depending on the amount of wealth being transferred.

Generation-Skipping Transfer Taxes and Tax Exemptions

Due to the generation-skipping trust's viability as a loophole to avoid federal estate taxes, changes were made to the tax code in 1986 that created a generation-skipping transfer tax. Tax exemptions, as secured by the American Taxpayer Relief Act of 2012, ensure that people transferring modest sums of wealth to younger generations don't have to bear the brunt of the tax burden. The American Taxpayer Relief Act of 2012 established a permanent $5 million tax exemption on generation-skipping transfers, which means that there is only a federal tax on a generation-skipping transfer of wealth if the amount of wealth exceeds $5 million. This amount of $5 million adjusts to account for inflation; the generation-skipping transfer tax exemption increased from $5.43 million in 2015 to $5.45 million in 2016.


Further Reading


Why the Generation-Skipping Transfer Tax Sparked Perpetual Trusts
heinonline.org [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

Comparing a Reformed Estate Tax with an Accessions Tax and an Income-Inclusion System, and Abandoning the Generation-Skipping TaxComparing a Reformed Estate Tax with an Accessions Tax and an Income-Inclusion System, and Abandoning the Generation-Skipping Tax
heinonline.org [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

Generation-skipping trusts and problems of authority: parent-child relations in the dissolution of American families of dynastic wealthGeneration-skipping trusts and problems of authority: parent-child relations in the dissolution of American families of dynastic wealth
books.google.com [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

Simplifying the use of the generation-skipping transfer tax exemptionSimplifying the use of the generation-skipping transfer tax exemption
search.proquest.com [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

Annals of Tax Reform: The Generation-Skipping TransferAnnals of Tax Reform: The Generation-Skipping Transfer
heinonline.org [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

The Generation-Skipping Transfer Tax and Sociological Shifts in Generational Length: Proposing a Generation-Inflation Index for TransitionThe Generation-Skipping Transfer Tax and Sociological Shifts in Generational Length: Proposing a Generation-Inflation Index for Transition
heinonline.org [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …

The tax economics of a qualified personal residence trustThe tax economics of a qualified personal residence trust
search.proquest.com [PDF]
… 38, 69, 150 (2001) (repealing the estate and generation-skipping transfer taxes after December 31, 2009 and … 2006] GENERA TION-SKIPPING TRANSFER TAX … They indicate that liberal rules of trust modification and termination, along with trust provisions allowing each …



Q&A About Generation-Skipping Trust


What was changed in 1986 that created a generation-skipping transfer tax?

Changes were made to federal estate taxes that created a generation-skipping transfer tax. Tax exemptions secured by American Taxpayer Relief Act of 212 ensure people transferring modest sums of wealth do not have to bear brunt of tax burden. Generation skipping transfer tax exemption increased from 5.43 million in 215 to 5.45 million in 216 due to inflation adjustments and permanent nature of exemptions established by American Taxpayer Relief Act of 212 .

What amount must be exceeded for there to be an additional tax on transfers between generations?

There is only an additional federal tax on transfers between generations if the amount exceeds $5 million (adjusted for inflation). This amount adjusts every year based on changes in consumer prices as measured by CPI (Consumer Price Index).

Why would someone use this method?

To avoid estate taxes on an individual’s right to transfer property upon his death.

Is there any way around this rule?

No, there isn't any way around this rule unless you plan ahead and make sure your assets don't exceed $5 million when you die or before you die if possible so that your heirs can inherit without paying any taxes or penalties at all."

How does it work?

The assets are passed down to the grantor's grandchildren, not the grantor's children.

Who benefits from a generation-skipping trust?

The grantor's grandchildren benefit from a generation-skipping trust.

What is a generation-skipping trust?

A generation-skipping trust is a type of legally binding trust agreement in which the contributed assets are passed down to the grantor's grandchildren, not the grantor's children.