Generally, a generation skipping trust is a trust that provides for a transfer to a skipped person or a skipped generation. Generation skipping issues can be a concern when a grantor wishes to create a dynasty trust or would like to leave assets to a grandchild rather than a child. A skipped person is a natural person assigned to a generation which is two or more generations below the transferor. For example, a transferor’s grandchildren.
A generation skipping trust or the inclusion of a generation skipping trust in an overall estate plan will depend on the goals and the wishes of the client, as well as their overall assets, titling, and nature of their assets. Generation skipping trusts are ones that are reviewed on a case by case basis for inclusion, but generally, clients that would like a generation skipping trust are clients that hope to preserve their assets for their grandchildren or for future generations. If you are considering including a generation skipping trust in your estate plan or would like to learn more, contact an experienced DC estate planning lawyer.
The benefits of a generation skipping trust are that assets can be preserved for multiple generations and are not distributed outright to the next generation. For example, in a traditional trust an individual or a client in his or her document stating that at his or her death, his or her assets will move outright to his or her children. Often what happens is that the assets are held in a continued trust where children may receive distributions of income or some distribution of principal, but not actually be entitled to portions of the trust. More simply, the trust will not terminate during their lifetime.
Instead of this, the trust will continue to carry on for the preservation of the gross asset or the gross law for many generations in the future. Often this requires that a client has to be of a certain amount of wealth for a generation skipping trust and the administration of a trust for that long to be beneficial to achieve his or her goals.
Generally, planning for generation skipping is done while both spouses are alive. Often, after the death of the first spouse, it is difficult to make a generation skipping transfer occur with the first spouse’s assets. Generally, it is a type of planning that is done long before someone has passed away.
Typically, a bypass trust is created for the benefit of a surviving spouse. A bypass trust after the death of the first spouse allows for assets to be held in trust for the surviving spouse. The assets are held for the surviving spouse and then after the surviving spouse’s death, they are distributed on to the second spouse.
An education and medical trust for a skipped person is a trust that is created for the purpose of paying tuition or medical expenses of the transferor’s descendant. If a beneficiary has the power to appoint to a non-skipped person such as a charity, then a taxable transfer will have taken place and the trust assets can be used to pay the tuition and medical expenses of the transferor’s descendants forever. At the death of the last descendant, the trust can pass to a charity as a taker, in default, of the exercise of the power of appointment.
Generation skipping can be beneficial if a client wants to preserve his or her assets for future generations. If that’s a goal of the client, it may be beneficial for him or her to include generation skipping provisions and for an attorney to review the client’s generation skipping tax liability. However, generation skipping can result in issues more often because of mistakes or the simple misunderstanding that a skip would actually happen.
A trust and estate attorney can evaluate an overall estate plan as well as the goals and wishes in consideration of the level of wealth and nature of the client’s assets to determine whether or not planning for generation skipping is necessary or will be beneficial as part of a comprehensive estate plan.