Use a generation-skipping trust to protect assets from creditors or spouses
Generation-skipping trusts can also be used to protect assets from creditors or a divorcing spouse, or to guard assets a trustee believes will grow substantially in value over time. That's why most families should at least consider this type of trust.
For example, a moderately wealthy older couple could put money in a generation-skipping trust, reserving the ultimate distribution for their grandchildren. But they could make the trust assets available to their children for their needs. If the couple transferred those assets outright to the children, and then from them they went to the grandchildren, the assets could be taxed twice at a rate of 45 percent; once when the assets pass from the grandparents to their children, and then again when they pass from their children to their grandchildren. By establishing a generation-skipping trust, the couple makes sure the assets are taxed only once, at the time of the initial transfer to the trust.
Because the second generation never technically owns the assets (they only have a right to distributions for reasonable needs), the trust assets have some protection from the claims of creditors or divorcing spouses in the second generation. "This is not just a strategy for the wealthy. This is usable by anyone. In my practice, even clients with modest net worth might benefit from such a trust," says Philip Feldman, a trusts and estates partner with Coblentz Patch Duffy & Bass in San Francisco.
Limits to a generation-skipping trust
There's a limit on the amount that can be transferred into such a generation-skipping trust. Currently, there's a $2 million exemption; that is, each person may leave up to $2 million in a generation-skipping trust free of the generation-skipping transfer tax.
Coincidentally, you can also leave up to $2 million to your family free of estate tax, so if you plan carefully, you can leave up to $2 million in a generation-skipping trust without any transfer tax. Any transfers in excess of this limit will be subject to gift or estate tax when the senior generation passes along the assets, and an additional generation-skipping tax is imposed when the middle generation of beneficiaries die and the property is transferred to the third-generation beneficiaries. Every dollar over the $2 million exemption is subject to the highest existing estate tax rate, currently 45 percent. But with proper planning this exempt $2 million may grow to a sizable amount that gets transferred free of tax when the middle generations die.
Learning how to avoid the gift tax.
what about grand children not born at the time teh trust say (Gallo trust) was established. Are teyy still beneficiaries?
great article. I have children benefiting a Generation S.trust. My sisters do not. Where is thier benefit as second generation, if ever?
Is the amount received by the grandchildren taxed as income or are no taxes paid on the amount by the receiver