GSTs leapfrog a generation to offer estate tax advantages

Generation-skipping trusts (GSTs) can provide certain protections and benefits that other trusts don’t.

Wealth transfer is about more than just money – it’s about preserving your legacy and the estate you’ve worked hard to grow. Trusts are common estate planning tools to help minimize an estate’s exposure to taxes, probates and the like.

There is a vast array of options when it comes to choosing the type of trust and fiduciary arrangements that are right for you. One of these options is a “generation-skipping” trust, a GST, which may be a beneficial strategy to help preserve your estate and your wealth for more than just the next generation of your family.

Key GST elements

A GST is used to pass down assets and property to a later generation. In essence, the individual creating the trust – the grantor – skips over their children for estate taxes when passing on their inheritance.

GSTs are irrevocable and legally binding, meaning they cannot be modified or revoked. Beneficiaries do not need to be direct family members or blood relatives; however, the beneficiary cannot be a current or former spouse. Beneficiaries must also be at least 37.5 years younger than the grantor.

The federal generation-skipping tax exemption has a high threshold and is indexed for inflation. In 2023, the amount was increased to $12.92 million for individuals and $25.84 million for couples.

Benefits of GSTs

• GSTs help forego a round of estate taxes. Instead of assets being taxed once within your estate and again within your child’s estate before reaching your grandchildren, they’re taxed only once before reaching those heirs.
• For larger estates, GSTs may allow for clearer, more comprehensive estate planning and longevity tools.
• GSTs ensure that your financial legacy lasts for at least the next two generations.
• You’re not limited to choosing immediate family members as beneficiaries.
• Your estate’s exposure to creditor claims is more limited under a GST, and assets are better protected.
• The trustor can give their children access to any income or appreciation the GST’s assets generate while still leaving the assets themselves in trust for grandchildren.

Potential drawbacks of GSTs

• Very large estates (those surpassing the $12.92 million threshold) may still be subject to the 40% transfer tax (if the estate is paid to the skip person) plus a 40% estate tax.
• As with other trust structures, GSTs are managed by a trustee, meaning you’ll need to make a thoughtful selection and account for related administration costs.
• Tax filing for the grantor will become more complex.
• Depending on market conditions and the financial management of trust assets, the skipped generation might not benefit from a substantial amount of income produced by asset appreciation – potentially leading to disruption in family relationships if mismanaged.

In what circumstances are GSTs deployed successfully?

A GST is not the right fit for everyone’s financial picture. Although the individual you select acts as your beneficiary, the first generation – your children – can still benefit from the trust while managing their own estates.

Your estate can be either too big or too small to use this fiduciary tool successfully. Some estates are too small to benefit from generation-skipping tools, as the assets may not appreciate enough to support direct descendants. Conversely, if your estate exceeds the $12.92 million limit your assets may be subject to hefty tax implications.

Talk to your advisor about your legacy goals, GSTs and the other avenues to maximizing your wealth for future generations.

Sources: trustandwill.com; annuity.org; investopedia.com; cfbjs.com

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.