Many people create trusts for themselves or their children. However, you may have your heart set on creating a trust for your grandchildren. You are just not sure what kind of trust would work for them. In cases like yours, your family might benefit from using a generation skipping trust.
A generation skipping trust is exactly how it sounds. It skips over your children to pay out to your grandchildren. As The Motley Fool explains, there are a number of reasons why you might use a generation skipping trust.
Preserving an inheritance for grandchildren
Sometimes adult children have problems in their lives. They gamble, spend lavishly and fail to put away savings, or abuse drugs or alcohol. Some adult children marry and then divorce, which can deplete much of their assets. If you note these situations in your children, you may fear your grandchildren will have little to inherit. With a generation skipping trust, you can leave your grandchildren money or property without having to give any to your adult children first.
Avoiding estate taxes
A lot of people use generation skipping trusts to reduce their tax burden. You may hope your children will pass your estate on to their children as an inheritance, but there is a chance the government will tax your estate twice, once after your death and again after your own children die. This will deplete some of what your grandchildren could inherit.
A generation skipping trust may help you avoid this problem. These kinds of trusts still undergo taxation, but you can set up your trust so that it avoids not only estate taxes but special fees like a generation-skipping transfer tax.
Leaving an inheritance for multiple generations
You might be old enough that you also have great-grandchildren. If you have a lot of wealth and want to pass it on to multiple generations, you may compose a generation skipping trust tailored to handle both your grandchildren and great-grandchildren. You might also include other descendants like grand-nephews. In this way, using a generation skipping trust can help keep a lot of your wealth in your family.