A generation-skipping trust could be beneficial if you have significant assets and would like your children and grandchildren to benefit. Generation-skipping trusts, also called dynasty trusts or legacy trusts, allow clients to provide for their children, grandchildren, and even great-grandchildren. Wealth transferred into a generation-skipping trust can be estate tax protected and creditor protected.
Attorney Christopher Heritage regularly implements generation-skipping trusts to help Palm Springs individuals preserve their wealth. Creating a generation-skipping trust may be a strategic option if you own significant assets and want to ensure that your grandchildren will benefit. If you have questions about how a generation-skipping trust could benefit you and your estate, contact Heritage Legal, PC today to schedule a consultation.
What Is a Generation-Skipping Trust?
A generation-skipping trust allows assets to pass to the grantor’s grandchildren, avoiding the probate process. The grantor is the person who creates the trust agreement and transfers assets into the trust. The beneficiary will become the owner of the assets in the trust. When creating a trust agreement, the grantor appoints one or more trustees to manage assets for the benefit of the beneficiary or beneficiaries.
Generally, the beneficiaries of the generation-skipping trust are the grantor’s grandchildren. However, the beneficiary of a generation-skipping trust doesn’t need to be the grantor’s grandchildren. They can be any person at least 37.5 years younger than the grantor and not a current or ex-spouse of the grantor. A generation-skipping trust can be an important wealth-preservation tool for those with significant savings, real estate, or other assets.
The Benefits of Creating a Generation Skipping Trust
As the name implies, generation-skipping trusts can benefit not only your children but can skip to the next generation and benefit them. However, there is no requirement that a dynasty's trust skips any generation. Several generations can benefit from a well-planned generation-skipping trust. Multiple benefits come with using a generation-skipping trust. They allow estate planners to maximize the available assets for their children, grandchildren, and future generations.
Another benefit involves potential claims from creditors that could jeopardize the assets in the trust. Your named beneficiaries will be protected from claims made by others against the assets owned by the trust. The trust, not your children and grandchildren, owns the assets in the trust. As a result, anyone making a legal claim against one of your children or grandchildren cannot gain access to the assets held in the trust.
The Difference Between a Will and Dynasty Trust
When a testator creates a traditional will, his or her control over the distribution of assets stops with whomever he or she names as a beneficiary. It’s up to the beneficiary to determine how to manage these assets. If the beneficiary doesn’t manage the assets effectively, family wealth could be lost, and grandchildren may never benefit from it. When using a legacy trust, the grantor can maintain control over how his or her assets will be handled over successive generations.
Avoiding the Probate Process
Another benefit of creating a trust is to allow your beneficiaries to avoid the probate process. When a person creates a last will and testament, the probate court must execute the estate according to the will’s terms. In other words, the beneficiaries must wait for the probate court to access the assets. Creating a trust eases the transfer process between generations by severely limiting dependence on the probate court’s bureaucratic process. Trusts also provide grantors with privacy and confidentiality. While the public can gain access to details in the probate process, the trust agreement terms can remain confidential.
Limitations of a Generation-Skipping Trust
Some limitations come with creating a generation-skipping trust. One of the main concerns with this type of trust involves allowing future generations to make a recurring income from the assets within the trust. Dynasty trusts are considered irrevocable trusts. As a result, making changes to the trust takes a lot of work. Suppose you have any concerns about your family’s structure, such as changes in property valuation or divorce.
Suppose one of your grandchildren gets divorced, as his or her ex-spouse becomes entitled to some of the assets in the trust. Similarly, suppose the value of the property in the trust decreases significantly. Changing the terms of the trust agreement will be extremely difficult, which could present a challenge for future generations.
As the trust is irrevocable, you won’t be able to revoke the trust during your lifetime. If you’d like the option to move your assets into a different type of trust or invest them differently, you won’t be able to do so once a generation-skipping trust has been created. For these reasons, it’s important that you carefully consider the pros and cons of this type of trust. While it is possible to revoke an irrevocable trust in limited circumstances, it’s very challenging.
How Long Do Generation-Skipping Trusts Last?
In theory, generation-skipping trusts can continue as long as time allows. However, California has placed limitations on how long these trusts can last. In California, the trust can remain ongoing for 21 years after the trust creator or grantor’s death or 90 years after the trust was initially created.
The Tax Benefits of Generation Skipping Trusts
One of the goals of a generation-skipping trust is to transfer assets from the grantor’s estate to grandchildren. The grantor’s children do not take ownership of the assets transferred into the generation-skipping trust. As a result, the grantor can avoid estate taxes that would apply to them if the assets came into their possession. By skipping the opportunity to take ownership of the assets in the trust, the grantor’s children can avoid estate taxes that could otherwise be due.
Depending on the value of the assets in the trust, the grantor’s children could save significantly by avoiding estate taxes. However, generation-skipping trusts are liable for taxation when the value of the assets transferred into the trust exceeds the threshold amount of $12.02 million per individual in 2022.
Contact a Palm Springs Trust Attorney
If you’d like to learn more about generation-skipping trusts and the benefits they offer, attorney Christopher Heritage is here to help. Contact Heritage Legal, PC today to schedule an initial consultation and learn more about how we can help you protect yourself and your assets with a comprehensive estate plan. |