Unlock Generational Wealth: How Generation-Skipping Trusts Can Preserve Your Family’s Legacy for Grandchildren

When it comes to preserving substantial wealth for future generations, savvy families are increasingly turning to Generation-Skipping Trusts (GSTs) as a powerful estate planning strategy. These sophisticated legal instruments offer an opportunity to bypass traditional estate tax burdens while ensuring your grandchildren and future generations benefit from your life’s work.

Understanding Generation-Skipping Trusts

Generation-Skipping Trusts (GSTs) are an estate planning tool designed to transfer wealth to grandchildren, great-grandchildren, or non-related individuals who are at least 37.5 years younger than the grantor, avoiding the taxes that would typically be applicable if the wealth were passed down through each generation. A generation-skipping trust is an irrevocable trust that allows individuals to transfer assets to future generations (ex: grandchildren) without triggering gift or estate taxes.

The fundamental concept is elegantly simple yet powerfully effective. Passing assets from Generation 1 to Generation 3 avoids paying federal estate taxes twice on assets — once when passing to Generation 2 and again when passing to Generation 3. This strategic approach can preserve millions of dollars that would otherwise be lost to taxation.

Current Tax Advantages and Exemption Limits

The current tax environment presents an exceptional opportunity for wealth transfer planning. Every US resident also has a lifetime GSTT exemption of $13.99 million (or $27.98 million for a married couple). In other words, a married couple could transfer up to $27.98 million to a skip person without having to pay GSTT. This tax is equal to the highest federal gift and estate tax rate at the time of the transfer (40% in 2025) and is in addition to any other federal gift or estate tax that may be owed.

However, time is of the essence. The provisions relating to the GSTT exemption in the current tax law are set to sunset at the end of 2025. This means that as of January 1, 2026, the GSTT exemption will revert back to the amount that was allowed under the law effective in 2017 (an inflation-adjusted $5 million, or about half of what is currently allowed).

Key Benefits of Generation-Skipping Trusts

GSTs offer multiple advantages that make them attractive to high-net-worth families:

• Tax Efficiency: One of the biggest advantages of using a GST is the ability to skip a generation of estate taxes. Estate taxes are only accounted for when assets are transferred or distributed to your grandchildren (or other skip persons). However, if you pass assets to your children, who then give them to your grandchildren, the wealth ends up subject to two rounds of estate taxes instead of one.
• Asset Protection: Given the irrevocable nature of a GST, your assets can be protected from the claims of creditors and lawsuits. Asset Protection: as an irrevocable trust, any assets held within the trust are considered separate from the grantor’s personal estate and therefore are difficult to access in the event of any litigation against the grantor.
• Flexibility for Multiple Generations: Although the children’s generation is being “skipped” for estate tax purposes, they are still able to benefit from the assets being passed down to the grandchildren by having access to the income – and sometimes principal – of the assets that are placed in the GST.
• Long-term Wealth Preservation: By using a GST you’re able to ensure the wealth of your estate is protected for a minimum of two generations. Both your children, and your grandchildren (or other eligible beneficiaries) can benefit financially from the terms of your generation-skipping trust.

Who Should Consider Generation-Skipping Trusts

GSTs are particularly beneficial for families with substantial wealth. If you have an especially large estate — one that is likely to be hit by the federal estate tax, and one where your children will also end up having to pay the estate tax — a generation-skipping trust is likely a good idea for capital preservation.

However, these trusts aren’t suitable for everyone. For individuals with estates that fall below the estate tax exemption threshold, the cost and complexity of setting up and maintaining a GST might not be justified, as there would be little to no tax benefit. Families with Immediate Financial Needs: If your children or the immediate generation have significant financial needs, skipping over them to benefit the grandchildren might not be practical or fair.

Professional Guidance is Essential

Given the complexity of generation-skipping trusts and the significant tax implications involved, working with experienced legal professionals is crucial. For families in Nassau County and surrounding areas, consulting with a qualified Trust Attorney Nassau County can provide the expertise needed to navigate these sophisticated estate planning strategies effectively.

Trusted Elder Law and Trusts & Estates attorneys. Planning peace of mind with experience and compassion. | Fratello Law serves the legal needs of clients in the areas of TRUSTS & ESTATES, ELDER LAW, and REAL ESTATE. Every client is unique and we take the time to understand our clients’ individual needs. At Fratello Law, we love building lasting relationships with clients that span generations!

Time-Sensitive Planning Opportunity

The window for maximizing the current historically high exemption amounts is rapidly closing. Planning point: Take advantage of the increased lifetime estate/gift and GST exemptions before they sunset on Dec. 31, 2025. If you have not yet used all your available estate/gift and GST exemptions, now is a great time to consider making lifetime gifts. Absent any legislation, the temporarily increased exemption will decrease to about $7M, indexed for inflation, on Jan. 1, 2026.

Families considering generation-skipping trusts should act promptly to take advantage of the current favorable tax environment. The process of establishing these trusts requires careful planning, proper documentation, and strategic allocation of exemptions to maximize their effectiveness.

Moving Forward

Generation-skipping trusts represent a sophisticated wealth transfer strategy that can preserve family wealth across multiple generations while minimizing tax burdens. Generation skipping trusts can be a powerful estate planning tool for wealthy families looking to minimize the estate taxes they will pay over multiple generations. A GST provides individuals with a flexible tool that allows them to preserve their family’s wealth for generations to come, passing assets to their grandchildren while providing income to their children.

For families with substantial assets, the combination of current high exemption limits and the impending 2026 sunset creates a unique opportunity that may not be available again. By working with experienced estate planning professionals who understand the intricacies of generation-skipping trusts, families can create lasting legacies that benefit their grandchildren and future generations for years to come.