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What are reasons to use a generation skipping trust?

On Behalf of | Aug 13, 2020 | Estate Planning |

At your current stage in life, you might have grandchildren or even great-grandchildren that you want to inherit from you. Many parents rely on their grown children to pass along an inheritance, but you may want a more direct way to transfer some of your wealth to your grandchildren. This is where a generation skipping trust may assist you. 

Some parents worry that their adult children are not trustworthy enough to pass on money to the next generation. But even if your children are responsible and seek the best for their families, you might want to use a generation skipping trust for other reasons. Investorguide goes into detail how some families benefit from this kind of trust. 

Cutting down on taxes

You likely know what will happen if you pass an inheritance to your grandchildren through their parents. After giving your children their inheritance, the government will levy estate taxes on it. When your children pass on what they inherited from you to their children, the government taxes the inheritance again. By using a generation skipping trust to convey the inheritance to their grandchildren, you may bypass one of these levels of taxation. 

Avoiding creditors and debt expenses

While your adult child may want to leave your grandchildren the largest inheritance possible, circumstances could intervene to make that impossible. Your child may own a failing business, causing creditors to take a large share of the financial assets your child possesses. Your child could go also bankrupt because of personal debt. A car accident may cost your child a lot of money in medical bills. 

By placing an inheritance in a generation skipping trust, you do not have to worry about what might happen if your child owes a lot of money. Creditors cannot lay a claim to the trust money since your child does not own any of it. 

Dealing with divorce

You can also protect the inheritance of your grandchildren in the event your child divorces. In a divorce, a spouse can lay claim to a share of property or assets if they are marital property, which may include whatever inheritance you give your child if your child commingles it with marital assets. However, money in a generation skipping trust does not belong to your child, so the spouse of your child has no way to get a hold of it.