What It Actually Does
A generation-skipping trust is designed to benefit more than one generation while dealing with the tax consequences of moving wealth down to grandchildren or further.
Despite the name, it does not mean your children get nothing. A trust can support your children throughout their lives and preserve what remains for their descendants. Whether that suits you depends on your family, the assets involved, and how the structure is built.
An Example
Grandparents might want their daughter supported by a trust, with whatever is left preserved for her children.
An outright inheritance hands the daughter ownership and control, subject to everything going on in her own life. A continuing trust sets out who manages the property, when distributions can be made, and who takes the remainder. The instructions have to balance real support for the daughter against the longer-term intention for the grandchildren — and that balance is the whole design problem.
The GST Tax Is a Separate System
The federal generation-skipping transfer tax, usually shortened to GST tax, is its own tax regime. It can apply to transfers benefiting people two or more generations below you, and it can reach some transfers to unrelated younger beneficiaries as well.
Direct gifts, distributions out of trusts, and the ending of certain trust interests can all raise GST questions. Calling a document a generation-skipping trust does not by itself make anything tax-exempt. IRS overview of generation-skipping transfers.
Allocating the Exemption Is Where Plans Go Wrong
There is a GST exemption that can be allocated to qualifying transfers, but the allocation rules demand attention. Automatic allocation applies in some situations; in others an election or a deliberate allocation is the right move.
The trust’s terms, the type of transfer and the tax filings all have to line up. It is entirely possible to have a carefully drafted trust and still create an avoidable tax problem through incomplete funding records or a mishandled exemption allocation. IRS guidance on reporting gifts and allocating GST exemption.
Why This Needs an Attorney and a Tax Adviser Working Together
We need to look at prior gifts, existing trusts, the relevant returns and the intended beneficiaries before deciding how anything new fits in. Exceptions can change generation assignments, including where a parent has died. IRS rules concerning the predeceased-parent exception.
A family tree and a history of earlier transfers are often more important than the current account balances.
Massachusetts Estate Tax Is Its Own Question
A family can face a Massachusetts estate tax issue even when no federal estate tax is expected, so a long-term trust has to be judged inside the whole state and federal picture.
Income tax and basis matter too. Keeping assets out of a beneficiary’s taxable estate serves one objective while affecting whether those assets get a basis adjustment when that beneficiary dies. No single tax result should be read on its own.
The Trustee and Distribution Terms Matter as Much as the Tax
A trust meant to run for decades needs a workable succession process and clear standards for supporting beneficiaries. You may want flexibility for education, health, housing or something nobody has thought of yet, without handing every beneficiary unrestricted access.
The plan also has to say how future family changes get handled. A tax-efficient arrangement that generates constant disputes, or cannot respond sensibly when a beneficiary genuinely needs something, has missed the point.
You Do Not Have to Decide Before You Call
Start with what you want the property to accomplish, who should benefit, and how much control later generations should have. We will review the existing plan, explain the tax issues that apply to you, and tell you whether a continuing trust with GST planning is warranted.
If it is, the work includes the drafting, the funding coordination, and clear instructions for the people who will have to administer it long after the meeting is over.
Related reading: What is a GRAT, and how does it transfer wealth tax-free?
If you would like to talk it through, book a free 15-minute consult call with our Lead Intake Coordinator, Nicole Ott, or give us a call at 978-657-7437. There is no charge and no pressure — the goal is simply to work out what your family actually needs to do next.
