You have spent years saving up money for your children, but now that you have grandchildren, you want to provide for them as well. Some families in this situation believe the only way their grandchildren receive an inheritance is through their children first. This is where a generation-skipping trust may offer an alternative option.
Smart Asset explains that a generation-skipping trust allows you to pass an inheritance directly to your grandchildren, skipping over the previous generation in the process. There are a number of reasons why some grandparents choose this option.
Avoid double taxation
The problem with allowing your children to pass on an inheritance to your grandchildren is that the inheritance will incur estate taxes twice. The first time is when your children inherit it and the second time is when your grandchildren receive it. With a generation-skipping trust, you can skip over the initial inheritance tax. This allows your grandchildren to keep more of the inheritance.
Ensure your grandchildren will receive
In some family situations, grandparents know that their children are not responsible for their spending and might squander an inheritance meant for grandchildren. Even if your children do their best with their money, they may be in a financially precarious situation and could lose money to creditors. Using a generation-skipping trust may ensure your grandchildren’s inheritance will avoid these issues.
Pass money to other relatives
A generation-skipping trust does not only apply to grandchildren. You might have a great nephew or niece that you want to inherit. Perhaps you have a good friend who has young children that you want to provide for. As long as you name someone who is no older than 37.5 years younger than you, you can use a generation-skipping trust to provide for that person.