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What is a generation-skipping trust?


Passing on your property to your family members in the most advantageous way after your death likely constitutes one of your main goals in setting up your Michigan estate plan. But what if one of your adult children does not handle money well or tends to make poor financial decisions? In a case such as this, establishing a generation-skipping trust may well represent your best option.

Investor Guide explains that while you can name anyone as the beneficiary of a generation-skipping trust other than your spouse, former spouse or someone fewer than 37-1/2 years younger than you, most people name one or more of their grandchildren as the beneficiary or beneficiaries.

Providing for your children in a generation-skipping trust

Although you likely will name your grandchild(ren) as the generation-skipping trust beneficiary, this does not mean that you will be disinheriting your children. You can structure your trust so that your child(ren) will receive the income produced by the trust’s assets during his, her, or their lifetime(s), after which your grandchild(ren) will receive the trust assets themselves. This solves the problem of giving your financially irresponsible or incompetent child(ren) substantial assets outright.

Tax and other advantages                 

Generation-skipping trusts can take advantage of two tax exemptions: the estate tax exemption and the generation-skipping transfer tax exemption. Each of these exemptions amounts to $5.49 million if you establish the trust in your own name and $11.2 million if you establish the trust in the name of yourself and your spouse.

In addition to tax advantages, a generation-skipping trust provides other advantages as well. For instance, if one of your married adult children becomes divorced, his or her former spouse cannot invade the trust assets. Or if one of your adult children gets into financial trouble, his or her creditors cannot invade the trust assets.

This is general educational information and not intended to provide legal advice.

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