In addition to avoiding probate, some families create trusts so they can avoid taxes on the inheritance they want to give to their children. This is one of the reasons parents use generation skipping trusts. Like other trusts, a generation skipping trust allows you to pass on assets or property to your loved ones, but it does so in a particular way.
The Motley Fool explains that some people want to hand off an inheritance to grandchildren as well as children. They may intend for their children to receive money and then pass it along to their own children someday as part of their estate. But if the estate exceeds exemption limits, the government will tax the inheritance twice, once when the children get it and again when the grandchildren receive it.
A generation skipping trust allows you to gift assets to grandchildren directly, skipping over your children. While these trusts remain subject to taxation, by conveying an inheritance to your grandchildren, these trusts can reduce the estate tax burden. People can also design generation skipping trusts to avoid a generation-skipping transfer tax that may apply to gifting assets to grandchildren.
In some instances, parents use generation skipping trusts because they do not want their children to receive the assets. Sometimes adult children have problems handling money and their parents want to restrict what they can receive, or the adult children may have no active relationship with their parents. Generation skipping trusts can instead skip the inheritance past the children and transfer the money to the grandchildren.
In general, people create generation skipping trusts to avoid taxation burdens and not because of family issues. Whatever your reason, composing a generation skipping trust correctly may yield benefits in several ways, though people who are not familiar with generation skipping trusts may benefit from the assistance of an experienced attorney as they seek to create one.