If you have worked hard over your lifetime and managed to amass a sizable estate that you wish to pass down to future generations, you undoubtedly wish to avoid allowing the government to take a large portion of it in taxes before it can be passed down. That is precisely what can happen unless you create an estate plan that minimizes the tax impact on your estate upon your death. One tool that can be used in your estate plan is a generation skipping trust.

The Internal Revenue Code requires estate taxes to be paid on the estate of a decedent before any assets can be transferred, or passed down, to the beneficiaries or heirs. Although the estate tax rate changes on a regular basis, it is not uncommon for it to be as high as the highest individual income tax bracket. To put this in perspective, if you leave an estate valued at one million dollars, it is possible that over $300,000 of your estate will be lost to taxes before your heirs, or beneficiaries, receive anything. One solution, or loophole in the IRS code, is to use a generation skipping trust.

A trust is a legal agreement that requires a grantor (you), a trustee, a beneficiary and assets to fund the trust. As implied by the name, a generation skipping trust is a trust created by you that names your grandchildren as the beneficiaries, thereby “skipping” a generation. By leaving the assets to your grandchildren, they are not subject to estate taxes. Your children do not have to be left out of the trust entirely. You may be able to draft the trust in such a way that your children can receive benefits from the trust in the form of interest, for example, while the principal trust assets remain in the name of your grandchildren. By using generation skipping trusts, a family can often keep a sizable estate in the family for many generations without losing the bulk of it to estate taxes. Consult with your estate planning attorney for details about how a generation skipping trust may work for your estate planning purposes.

Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.

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