The question of whether benefits can “skip a generation” is a common one for estate planning attorneys like Steve Bliss in San Diego, and the answer, thankfully, is usually yes, though it requires careful planning. This concept revolves around strategically structuring a trust to provide for future generations, potentially bypassing the immediate one. This isn’t about disinheriting children, but rather about maximizing long-term financial security for grandchildren or later descendants, or even achieving specific goals like incentivizing education or responsible financial behavior. Roughly 65% of high-net-worth families are now actively considering multi-generational wealth transfer strategies, according to a recent study by a wealth management firm. This often involves utilizing techniques like dynasty trusts or strategically crafted trust provisions within a broader estate plan. It’s a sophisticated approach, but one that can offer significant advantages for families committed to long-term wealth preservation.
What is a “Skip Person” and Why Does it Matter?
The IRS defines a “skip person” as anyone two or more generations younger than the grantor (the person creating the trust). This classification is crucial because distributions to skip persons are subject to the Generation-Skipping Transfer (GST) tax, a separate tax imposed on transfers that bypass a generation. Currently, the GST tax exemption is quite high, over $13 million in 2024, allowing significant wealth to be transferred without incurring this tax. However, proper planning is still necessary to utilize this exemption effectively and avoid unintended tax consequences. The GST tax was enacted in 2001, and its purpose is to prevent the creation of dynasty trusts that perpetually shield assets from estate and gift taxes.
How Can a Trust Skip a Generation Legally?
Several mechanisms allow a trust to legally skip a generation. A common approach is to establish a dynasty trust, a long-term irrevocable trust designed to last for multiple generations. These trusts can be structured to distribute income and principal to grandchildren or great-grandchildren, effectively bypassing the current generation. Another method involves using a series of trusts, where the initial trust distributes assets to a second trust benefiting the skipped generation. It’s vital to understand that simply stating in a will or trust that benefits should skip a generation isn’t enough; the structure must comply with IRS regulations to avoid unintended tax consequences. The creation of these trusts must be reviewed by a qualified estate planning attorney to ensure it will benefit your heirs.
What are the Benefits of Skipping a Generation?
There are several compelling reasons why a family might choose to skip a generation with their estate plan. Perhaps the current generation is financially secure and doesn’t need or want the inheritance, while the grandchildren are pursuing education or starting businesses. Or maybe the grantor wants to incentivize responsible financial behavior in the skipped generation by attaching conditions to the inheritance. Skipping a generation can also provide greater control over how the assets are used, ensuring they align with the grantor’s values and goals. For example, a grandfather, a carpenter by trade, was deeply proud of his craftsmanship and wished to fund his granddaughter’s art school tuition, believing she possessed a similar creative talent. He established a trust specifically for that purpose, bypassing his own children who had pursued different careers.
What are the Potential Drawbacks?
While skipping a generation can be beneficial, it’s crucial to consider potential drawbacks. The current generation might feel slighted or misunderstood, leading to family conflict. There’s also the risk that the skipped generation isn’t prepared to manage a large inheritance, especially if they’re young. Careful consideration must be given to the financial maturity and responsibility of the beneficiaries. It’s essential to communicate openly with all family members about the estate plan to minimize misunderstandings and potential disputes. Steve Bliss emphasizes that transparency and open communication are key to successful estate planning.
Can You Skip a Generation and Still Provide for Your Children?
Absolutely. Skipping a generation doesn’t mean disinheriting your children. It simply means that a portion of your estate is directed towards future generations. You can structure your estate plan to provide for your children’s immediate needs, such as healthcare or education, while also establishing a separate trust for your grandchildren or great-grandchildren. This allows you to balance the needs of both generations and ensure that everyone is adequately provided for. A well-crafted estate plan should be flexible enough to accommodate changing circumstances and the individual needs of each family member.
What Happened When a Plan Went Wrong?
I recall a client, Mr. Henderson, who decided to skip a generation hoping to provide for his grandchildren’s college funds. He drafted a simple trust document himself, stating his intention, without understanding the GST tax implications. Upon his death, his estate was hit with a substantial GST tax bill, significantly reducing the amount available for his grandchildren. His children, though financially stable, felt resentful that a large portion of their inheritance was used to pay taxes, creating a rift in the family. It was a painful lesson in the importance of professional estate planning guidance. He had good intentions, but lacked the expertise to execute his plan effectively.
How Can Proper Planning Prevent Such Issues?
Thankfully, we were able to help another client, Mrs. Albright, avoid a similar fate. She wanted to create a lasting legacy for her great-grandchildren but was concerned about the GST tax. We worked closely with her to establish a carefully structured dynasty trust, utilizing her GST tax exemption and incorporating provisions to protect the assets from creditors and mismanagement. The trust included a trustee with financial expertise and regular reporting requirements to ensure accountability. It also outlined specific educational and charitable goals for the funds. This allowed her to fulfill her vision of providing for future generations while minimizing tax implications and safeguarding the assets. Her children and grandchildren were all involved in the planning process, fostering a sense of transparency and shared purpose. It was a beautiful example of how thoughtful estate planning can bring families together and create a lasting legacy.
Ultimately, deciding whether to skip a generation is a personal one. It requires careful consideration of your family dynamics, financial goals, and tax implications. Consulting with an experienced estate planning attorney like Steve Bliss is essential to ensure that your plan is legally sound, tax-efficient, and aligned with your values. Remember, a well-crafted estate plan is not just about transferring assets; it’s about creating a lasting legacy and providing for the future of your family.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Map To Steve Bliss at San Diego Probate Law: https://g.co/kgs/WzT6443
Address:
San Diego Probate Law3914 Murphy Canyon Rd, San Diego, CA 92123
(858) 278-2800
Key Words Related To San Diego Probate Law:
| California living trust laws | irrevocable trust | elder law and advocacy |
| charitable remainder trust | special needs trust | trust litigation attorney |
| revocable living trust | conservatorship attorney in San Diego | trust litigation lawyer |
Feel free to ask Attorney Steve Bliss about: “What triggers a trust update?” or “What happens if a beneficiary dies during probate?” and even “What is a certification of trust?” Or any other related questions that you may have about Trusts or my trust law practice.