Estate Planning: Generation Skipping

Generation-skipping is an estate planning strategy that involves transferring wealth directly to grandchildren or great-grandchildren, bypassing the intermediate generation (typically the children of the wealth holder).

This approach aims to minimize estate taxes and maximize the amount of wealth passed down through multiple generations.

Why Choose Generation-Skipping?

Many high-net-worth individuals opt for generation-skipping strategies to:

1. Reduce overall estate taxes across multiple generations
2. Provide financial support to younger generations who may have greater financial needs
3. Preserve family wealth for future generations
4. Protect assets from potential creditors or divorce settlements in the intermediate generation

Advantages of Generation-Skipping in Estate Planning

Tax Benefits

One of the primary advantages of generation-skipping is the potential for significant tax savings.

By bypassing the intermediate generation, you can avoid paying estate taxes twice – once when assets pass from grandparents to children, and again when they pass from children to grandchildren.

Wealth Preservation

Generation-skipping allows for the preservation of family wealth over multiple generations.

This can be particularly beneficial for families with significant assets or family businesses they wish to keep intact.

Flexibility in Distribution

This strategy provides flexibility in how and when assets are distributed to younger generations, allowing for more targeted financial support based on individual needs and circumstances.

Who Should Consider Generation-Skipping Strategies?

Generation-skipping estate planning is typically most beneficial for:

1. High-net-worth individuals with estates exceeding the federal estate tax exemption
2. Families with substantial generational wealth
3. Business owners looking to preserve their company for future generations
4. Individuals whose children are already financially secure and don't need immediate inheritance

Recommended Estate Planning Strategies for Generation-Skipping

Generation-Skipping Transfer Trusts (GST Trusts)

GST trusts are one of the most effective tools for implementing a generation-skipping strategy. These trusts allow you to transfer assets to skip persons (typically grandchildren) while utilizing your lifetime GST tax exemption.

How GST Trusts Work

1. Asset Transfer: The grantor (usually a grandparent) transfers assets into the trust.
2. Beneficiary Designation: The trust names skip persons (e.g., grandchildren) as beneficiaries.
3. Tax Exemption: The transfer utilizes the grantor's lifetime GST tax exemption (currently $12.92 million as of 2023).
4. Growth: Assets in the trust can grow tax-free over time.
5. Distribution: Beneficiaries receive distributions according to the trust terms, potentially avoiding additional estate taxes.

Benefits of GST Trusts

• Tax Efficiency: Bypass estate taxes at the children's generation level.
• Wealth Preservation: Protect assets from creditors or divorces in intermediate generations.
• Flexibility: Can be structured to provide for multiple generations.
• Control: Grantors can set specific terms for asset distribution and use.

Key Considerations

• Exemption Limits: Carefully track and allocate your GST tax exemption.
• Irrevocability: Most GST trusts are irrevocable, limiting future changes.
• Complexity: Require careful planning and ongoing management.
• State Laws: Trust laws vary by state, affecting structure and benefits.

Types of GST Trusts

1. Dynasty Trusts: Long-term trusts designed to benefit multiple generations

   • Can theoretically last forever in some jurisdictions
   • Ideal for preserving family wealth over many generations

2. Grantor Retained Annuity Trusts (GRATs): Trusts that pay an annuity to the grantor for a set term before passing assets to skip persons

   • Useful for transferring appreciating assets
   • Can provide tax benefits if assets grow faster than the IRS assumed rate

3. Charitable Lead Trusts (CLTs): Trusts that make payments to charity for a set term before distributing remaining assets to skip persons

   • Combine philanthropic goals with family wealth transfer
   • Can provide significant estate and gift tax savings

4. Qualified Terminable Interest Property (QTIP) Trusts: Can be structured to benefit a spouse, then skip to grandchildren

   • Provides for spouse during their lifetime
   • Allows control over ultimate distribution of assets

With GST trusts, high-net-worth individuals can create a powerful legacy plan that maximizes wealth transfer across multiple generations while minimizing tax liabilities.

Family Limited Partnerships (FLPs)

FLPs can be used in conjunction with GST trusts to transfer business interests or other assets to younger generations while maintaining some control over the assets.

Optimal Jurisdictions for Trusts and Family Offices

Trust-Friendly States in the US

Some US states offer more favorable trust laws for generation-skipping strategies:

1. Delaware: Known for its flexible trust laws and strong asset protection
2. Nevada: Offers no state income tax and strong privacy protections
3. South Dakota: Provides perpetual trusts and no state income tax
4. Alaska: Offers self-settled trusts and strong asset protection laws

International Trust Jurisdictions

For those considering offshore options:

1. Cayman Islands: Strong privacy laws and no direct taxation
2. Cook Islands: Robust asset protection laws
3. Bermuda: Stable legal system and favorable trust laws

Family Office Structures and Jurisdictions

Family offices can be established to manage generation-skipping strategies:

1. Single Family Office (SFO): Dedicated to managing the wealth of a single family
2. Multi-Family Office (MFO): Serves multiple families, offering economies of scale

Optimal jurisdictions for family offices include:

1. United States: New York, California, or Florida for access to financial expertise
2. Singapore: Favorable tax laws and a stable financial environment
3. Switzerland: Traditional wealth management hub with strong privacy laws

At Sans Border, we are dedicated to offering you a full suite of estate planning services, optimizing your wealth transfer strategy across borders and generations.