What is a generation-skipping trust?

A generation-skipping trust is a legal agreement in which the assets of the grantor are held in trust and transferred to the grantor’s grandchildren, as opposed to the children. This type of trust is used primarily for estate planning and tax purposes.

The advantage of a generation-skipping trust lies in its tax avoidance result. When a grantor transfers assets to her children, the transaction is usually subject to estate taxes. By transferring the assets of the trust to the grandchildren, the grantor’s children never take ownership of the assets, and the estate tax does not apply. Although the children of the grantor do not directly receive the trust assets, there are still ways to set the trust up to provide financial benefits to the children.