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Why generation-skipping trusts work for many

Many Pennsylvania residents have worked hard to amass their current level of wealth. The prospect of losing a sizable portion of that wealth to estate tax requirements can be distressing. A number of solutions are to be found for reducing estate tax obligations, including trusts that can also preserve wealth from seizure during divorce or other legal actions.

An example is found in a generation-skipping trust, which allows individuals to pass on wealth to their grandchildren while also allowing their adult children to benefit. The trust is funded in the same way as other types of trusts, and the assets placed into the vehicle become the property of the trust itself, not the individuals who funded it or those named as beneficiaries. This is an important feature of the trust, as it provides a level of protection against loss.

For example, consider an adult child who has two children from a previous marriage, and who remarries and has a third child with his new wife. If the grandparents of those children create a trust that passes wealth to the children, the assets become subject to division during divorce, or can be lost through a lawsuit or other financial turmoil. If the son predeceases his new wife, she could inherit the remainder of those assets, and could then pass them on in any way she likes. The first two grandchildren could end up being completely excluded from their intended inheritance.

Generation-skipping trusts offer a good solution to this risk. An individual's children could be given the right to have access to any earnings that the trust generated, but the primary funds will be held for the grandchildren. In addition, those assets will pass down free from the estate tax, which is what makes these types of estate-planning tools so attractive to many in Pennsylvania.

Source: Forbes, "Do You Need A Trust For Your Estate Plan?", Gary Plessl and Kevin Houser, May 14, 2015

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