generation skipping trust
A trust designed to pass assets directly to grandchildren or later generations, skipping the middle generation to minimize estate taxes.
Example
“The generation skipping trust transferred $5 million to grandchildren avoiding estate tax at two generational levels.”
Memory Tip
SKIP a GENERATION — pass assets directly to grandchildren. Avoids estate tax twice.
Why It Matters
Generation skipping trusts matter because they help wealthy families preserve more wealth across multiple generations by avoiding estate taxes at each level of transfer. Understanding this tool is crucial for high-net-worth individuals who want to maximize what their grandchildren inherit rather than losing significant portions to federal taxes.
Common Misconception
Many people mistakenly believe that generation skipping trusts allow them to completely avoid all taxes and pass unlimited wealth to grandchildren tax-free. In reality, these trusts are subject to generation skipping transfer taxes and must comply with specific IRS rules, including using the federal generation skipping transfer tax exemption which has limits.
In Practice
Suppose a grandparent with a 15 million dollar estate creates a generation skipping trust instead of leaving assets directly to their children. By structuring it properly and using their generation skipping transfer tax exemption, they can pass a significant portion directly to grandchildren while only paying taxes once, rather than paying estate taxes when assets pass to the middle generation and again when they pass to grandchildren.
Etymology
From the generation-skipping transfer tax — minimizing tax across multiple generations.
Common Misspellings
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