What is a generation-skipping trust and how does it work?

On Behalf of | Sep 17, 2021 | Uncategorized

As a resident of Pennsylvania, you might want to create a trust to leave your assets to your loved ones. If you’re getting older, you may want to create one that leaves your assets to your grandchildren. A generation-skipping trust could be the best option.

What is a generation-skipping trust?

There are many different types of trusts. A generation-skipping trust is one of them. It allows you to pass your assets down to your grandchildren instead of your children. This is why it mentioned “generation-skipping.” When you draft this type of trust as part of your estate plan, it allows your assets to avoid being subject to estate taxes that would otherwise be applied after you pass away. It’s a great option if you want to preserve your assets and have a significant amount of money.

How does a generation-skipping trust work?

Generation-skipping trusts automatically transfer assets to the grantor’s grandchildren. This means that you, the grantor, do not hold the title to the assets. This allows you to skip the responsibility of estate taxes that would be applied if you left your assets to your children instead of your grandchildren. However, you don’t have to leave your assets to your grandchildren or even a family member when you have a generation-skipping trust. Your beneficiary can be anyone at least 37.5 years your junior as long as it’s not a spouse or former spouse.

How do taxes affect a generation-skipping transfer trust?

While generation-skipping trusts are a great option for avoiding estate taxes, tax rates on them have varied over the years. With the American Taxpayer Relief Act of 2012, it was established that federal taxes imposed on generation-skipping trusts would only apply to trusts that are transferred with amounts over $5 million. Usually, this is only the case with amounts that are very high and affect individuals who are very wealthy.

If you have significant assets, you might want to consider a generation-skipping trust. It can help you build up a nice nest egg to leave your heirs.

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