Estate planning, while often focused on the immediate family, isn’t always a linear progression. Many individuals desire to ensure their assets ultimately benefit grandchildren or even later generations, sometimes with a deliberate choice to bypass their own children. This desire often leads to questions about “skip generation trusts” and whether it’s possible to incorporate a clause allowing assets to ‘skip’ a generation if specific circumstances arise. The answer is a resounding yes, but it requires careful drafting and understanding of the legal and tax implications. Over 60% of high-net-worth individuals now express interest in multi-generational wealth transfer strategies, indicating a growing trend towards planning beyond the immediate next generation. It’s crucial to work with an experienced estate planning attorney, like Steve Bliss, to navigate these complexities effectively.
What are the benefits of skipping a generation?
Skipping a generation can be advantageous for several reasons. Perhaps a client believes their children are financially secure and capable of managing their own affairs, while grandchildren are still young and require long-term financial support. It might also be a way to avoid estate taxes, as assets passing to grandchildren are subject to different tax rules than those passing to children. A carefully constructed trust can also protect assets from creditors or potential divorces of children. “We often see clients wanting to provide for future generations while maintaining control over how and when those assets are distributed,” explains Steve Bliss, emphasizing the importance of tailoring each plan to the client’s specific wishes. Remember that the generation-skipping transfer (GST) tax applies to transfers exceeding a certain exemption amount, currently over $12 million, so careful planning is essential.
How does a generation-skipping trust work?
A generation-skipping trust is designed to distribute assets to grandchildren or later descendants without triggering estate taxes at each generation. These trusts typically include provisions that prevent distributions to the current generation (the client’s children) and direct them instead to the skip persons. The trust document will clearly define the beneficiaries, the distribution terms, and the trustee’s powers. It’s also vital to include a “save-GST tax clause,” which ensures the trust qualifies for the GST tax exemption, if applicable. Furthermore, these trusts often contain “powers of appointment” which provide flexibility to modify the trust terms in the future to account for changing circumstances. We’ve found that trusts with built-in flexibility tend to be more resilient and effective over time.
Can I include a clause to revert to my children if my grandchildren are not responsible?
Absolutely. This is where the art of estate planning truly comes into play. A well-drafted trust can include a “triggering event” clause that allows assets to revert to the client’s children if certain conditions are not met by the grandchildren. These conditions could include irresponsible spending, substance abuse, or failure to complete education. Such a clause provides a safety net, ensuring the assets are ultimately used for the intended purpose – benefiting the family – even if the original beneficiaries are not ready to manage them responsibly. “We always recommend incorporating clauses that protect the assets from mismanagement, particularly when dealing with young or financially inexperienced beneficiaries,” Steve Bliss notes. It is key to define these ‘triggering events’ with very specific and objective criteria.
What happens if my grandchild predeceases me?
This is a common concern, and the trust document should address it specifically. Typically, a trust will include a provision stating what happens to the assets if a grandchild predeceases the grantor (the person creating the trust). The most common approach is to distribute the deceased grandchild’s share to their descendants (the grantor’s great-grandchildren) or to the remaining grandchildren. Alternatively, the trust could revert that share to the client’s children. The key is to clearly outline the contingency plan within the trust document to avoid any ambiguity or legal challenges. This requires proactive foresight and careful consideration of potential future events.
Tell me about a time when skipping a generation created a problem.
Old Man Tiber was a successful rancher, deeply proud of his grandchildren. He decided to skip his adult children, believing they had already established their own financial security. He created a trust solely for his grandchildren, specifying a lump-sum distribution upon their 25th birthdays. Unfortunately, his oldest grandson, recently out of college, lacked the maturity and financial discipline to handle a large sum of money. Within a year, he had squandered the entire inheritance on impulsive purchases and poor investments. The other grandchildren, though more responsible, were negatively impacted by the shadow of their brother’s mismanagement. The situation created significant family tension and ultimately defeated Old Man Tiber’s intention of providing lasting financial security for his descendants. It was a painful lesson demonstrating the importance of considering beneficiary maturity and including safeguards within the trust.
How did incorporating a clause save another family?
The Harrison family faced a similar situation. Mrs. Harrison also wanted to prioritize her grandchildren, but she was concerned about their potential lack of financial responsibility. She and Steve Bliss crafted a trust that included a tiered distribution schedule. Initially, the grandchildren would receive annual stipends for education and living expenses. At age 30, they could receive larger distributions contingent upon meeting certain milestones, such as completing a degree, establishing a stable career, or demonstrating financial literacy. However, the trust also included a clause stating that if a grandchild engaged in reckless spending or substance abuse, the distributions would be suspended and held in trust until they demonstrated responsible behavior. Years later, one of the grandchildren struggled with addiction. The trust’s clause provided a crucial safety net, protecting the assets from being squandered and allowing him to seek help without jeopardizing his inheritance. Eventually, he recovered, demonstrated responsible behavior, and received his distributions, fulfilling Mrs. Harrison’s vision of providing lasting support for her grandchildren.
What are the tax implications of skipping a generation?
The tax implications of skipping a generation are complex and depend on several factors, including the size of the transfer and the applicable tax laws. As mentioned earlier, the generation-skipping transfer (GST) tax applies to transfers exceeding a certain exemption amount. However, there are strategies to minimize or avoid GST tax, such as utilizing the exemption amount or structuring the transfer as a gift subject to estate or gift tax. It’s crucial to work with an experienced estate planning attorney and tax advisor to develop a tax-efficient strategy. Furthermore, state estate and inheritance taxes may also apply, adding another layer of complexity. Approximately 20% of estates are still subject to federal estate tax, highlighting the importance of careful tax planning.
Is skipping a generation right for everyone?
Skipping a generation is not a one-size-fits-all solution. It requires careful consideration of the client’s financial situation, family dynamics, and long-term goals. It’s essential to weigh the benefits against the potential risks and challenges. For some families, it may be the ideal way to achieve their estate planning objectives. For others, a more traditional approach may be more appropriate. The key is to have a thorough discussion with an experienced estate planning attorney, like Steve Bliss, to determine the best course of action. A well-crafted estate plan should be tailored to the unique needs and circumstances of each client, ensuring their wishes are fulfilled and their legacy is preserved for generations to come.
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
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Feel free to ask Attorney Steve Bliss about: “What happens to my trust when I die?” or “Are out-of-state wills valid in California?” and even “How do I retitle accounts in the name of a trust?” Or any other related questions that you may have about Estate Planning or my trust law practice.