You probably have grandchildren that you wish to give an inheritance to. One way is to write them into your will. However, a generation skipping trust might also benefit your loved ones. This is a type of trust that allows you to pass assets to the generation after your children and can be of particular benefit if you have a large estate.
People have different reasons to create a generation skipping trust. As Smart Asset explains, this type of trust may provide different kinds of benefits depending on the situation.
Preserve your grandchildren’s inheritance
A generation skipping trust is an irrevocable trust, meaning money that you place into it is no longer yours. This provides protection against creditors if they come after you for unpaid debts. They cannot touch the money in the trust since you do not own it. Also, if you fear your children might lose money due to divorce or creditor actions, you may use a generation skipping trust to directly pass money to them without going to their parents first.
Using a trust to avoid taxes
Passing on money to your children means they may have to pay inheritance or estate taxes on it. When it comes time for your grandchildren to inherit money from their parents, they will have to pay those taxes again. However, a generation skipping trust allows you to skip over the first round of estate taxes. Your grandchildren receive the money first, so they do not lose as much money because of repeated taxation.
Benefiting people other than grandchildren
You do not have to use a generation skipping trust only for your grandchildren. You may have great nephews or nieces whom you want to inherit from you. You might even know children of close friends and wish to share an inheritance with them. As long as you designate a person who is 37.5 younger than yourself and is not your spouse or a former spouse, you may name someone to inherit from a generation skipping trust.