With a generation-skipping trust you can keep more of your hard-earned resources in the family for a longer period of time.
Why would there be any need to utilize an estate planning device like a generation-skipping trust to preserve your wealth? The answer can be broken down to three words: the estate tax.
We have a federal estate tax that is imposed on assets that you are transferring that exceed $5.25 million. The maximum rate of this tax is 40% in 2013. While New York estate tax is imposed on assets being transferred that exceed $1 million, with a graduated tax rate that caps at 16%. This tax is often criticized because people say it is an instance of double taxation. They say that the estate tax is levied on assets that are left over after taxes have been paid on earnings.
In fact, this description may not go far enough. The estate tax can be imposed over and over again as assets are passed from generation to generation, so the same assets can be taxed multiple times.
By conveying assets into a generation-skipping trust you can slow this process down considerably. With these devices you skip a generation and name your grandchildren as the beneficiaries.
Your children can benefit from assets that have been placed into the trust, so you are still providing something for them. However, they never own the assets outright so there is no estate tax imposed on that generation.
When they pass away the beneficiaries of the trust assume ownership of the assets. This transfer is taxable, but you facilitated the avoidance of one imposition of transfer taxes by creating the trust.