How can a generation-skipping trust protect family assets?

On Behalf of | May 4, 2020 | Trusts |

If you and your spouse have accumulated a considerable amount of wealth over the years, you likely have concerns about how to preserve these assets so as to pass them on to your children and other descendants. Under most circumstances, you likely can accomplish this via a will and trusts naming your children as heirs and beneficiaries. 

However, as Investor Guide points out, you probably need a different strategy if one of your children has proven himself or herself financially irresponsible. In this situation, you may wish to consider establishing a generation-skipping trust. 

Trust provisions 

In a generation-skipping trust, you designate someone other than your financially irresponsible child as the beneficiary. Usually this will be his or her children; i.e., your grandchildren. You can structure the trust so that you do not completely disinherit your child. For instance, you can provide that all trust income goes for your child’s benefit during his or her lifetime. (S)he will never own the trust assets however. Rather, your designated grandchildren will ultimately inherit and therefore own them. 

Trust advantages 

While the main purpose of a generation-skipping trust is to protect your assets from dissipation by a financially irresponsible child, other benefits include the following: 

  • You can claim a $5.49 million exemption when you make gifts to your grandchildren, i.e., to the trust, during your lifetime. If you and your spouse jointly establish the trust, this exemption increases to $11.2 million. 
  • Your estate can claim a $5.49 million federal estate tax exemption at the time of your death. This exemption increases to $11.2 million if you and your spouse jointly establish the trust. 
  • Should your financially irresponsible child divorce, his or her former spouse cannot invade the trust for purposes of marital property distribution or spousal support. 
  • Should (s)he encounter financial difficulties, such as a business failure and/or a bankruptcy, none of his or her creditors can invade the trust for purposes of debt payment. 

Perhaps the greatest advantage of a generation-skipping trust is the peace of mind it gives you knowing that your family’s assets will ultimately pass to your grandchildren, bypassing your financially irresponsible child.