What is a Generation Skipping Trust?

A generation skipping trust seeks to keep property in a family while avoiding estate taxes every other generation. A GST allows a generation of beneficiaries to profit from the income generated by the trust, without ever owning the property, so as to avoid having to pay estate taxes on it. After the income drawing generation has died, the property passes outright to the successive generation.

Are there tax advantages to a GST?

GST’s are not as tax free as other trusts. The IRS levies a Generation Skipping Transfer Tax on all transfers of property over more than one generation. This tax rate mirrors the estate tax rate (45% in 2009). Fortunately, there is a GSTT exemption which also mirrors the estate tax exemption ($3.5 million per individual in 2009).

A GST is created on the death of the grantor. The first $3.5 million of his estate will pass to whomever he chooses, tax free. After that, he will pay estate taxes on the rest of his estate, including the property which will go into the GST. Up to $3.5 million worth of property will be placed in the GST (financially it does not make sense to place more than the exemption amount in the GST). The property in the GST will then be used to provide income to the life beneficiaries (the first generation after the grantor) for the remainder of their lives. On their death, the property in the GST passes to the next generation, without estate taxes (since they were assessed at the time of the creation of the GST). This trust allows the assets to grow over a long period of time, while only being assessed taxes for their value at the creation of the trust.

Concerns with regard to a GST:

This trust is only a good choice for grantors if they are sure that the generation which becomes the life beneficiaries are able to provide for themselves without the use of the property in the trust (since the life beneficiaries will not have access to the trust property).

It is possible to create a GST for someone who is not a family member. Also, each individual is allowed the GST exemption at their death. Therefore, a couple with a large estate may create two separate GSTs for their beneficiaries. It is also possible that someone may want to create multiple GSTs by splitting up their exemption into separate trusts.

A GST is most effective when coupled with other estate planning devices. To know which is the best combination for yourself, speak with an experience estate planning attorney.