Protect Your Family’s Financial Legacy From the Tax Man With a Generation-Skipping Trust

A generation-skipping trust allows the transfer of assets to grandchildren or great-grandchildren and shields them from taxes.

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For high and ultra-high-net-worth families, estate planning is a crucial aspect of protecting the family legacy and future generations with little to no tax burden.

First, a word about estate taxes, which can take a big bite out of that financial legacy.

Estate taxes are levied on assets that exceed an annually adjusted maximum. For 2025, that maximum, known as the lifetime gift and estate tax exemption, is $13.99 million for single taxpayers and $27.98 million for couples filing jointly.

These high levels were set by the Tax Cuts and Jobs Act (TCJA) enacted into law by President Donald Trump in 2017. Without action by Congress, the lifetime gift and estate tax exemption will “sunset,” or revert to 2017 levels, adjusted for inflation, on Jan. 1, 2026.

That would dramatically lower the threshold to around $7 million for single taxpayers and $14 million for married couples filing jointly and effectively put many more estates within estate tax territory.

The estate tax rate can be as high as 40 percent.

One tactic for reducing estate taxes is to skip a generation when passing down your assets.

This strategy is not necessarily tax-free, however, and you may find yourself dealing with the generation-skipping transfer tax (GSTT), a federal tax on assets that skip a generation, as the name implies. That’s in addition to estate taxes.

There are ways to shield generational assets, however. One method involves creating a generation-skipping trust (GST).

What Is a Generation-Skipping Trust?

A GST allows individuals to transfer assets to their grandchildren or anyone who is at least 37.5 years younger than the grantor, while avoiding estate taxes.

How does this work? By bypassing the trust creator or grantor’s children, a GST allows these assets to be taxed only once, when they are transferred to the grantor’s grandchildren or great-grandchildren.

As a result, they avoid being taxed at each generation of inheritance.

Notably, state taxes only apply to these assets if they exceed a certain threshold.

In 2025, the generation-skipping trust tax exclusion is the same as the lifetime gift and estate tax exemption: $13.99 million for individuals and $27.98 million for married couples filing jointly.

The generation-skipping transfer tax is a flat 40 percent tax rate, excluding the amount covered by the generation-skipping trust tax exclusion.

GSTs provide other protections as well.

For instance, assets in a GST are shielded from creditors, divorce attorneys, and other claims.

Plus, the grantor can allow income generated from assets in the trust to transfer to their children.

Putting It Into Perspective

To make the benefits of a GST clearer, let’s look at a real-world example.

Suppose Amanda has an estate worth $30 million. She has one daughter and two grandchildren. Amanda passes everything on to her daughter when she dies. When the daughter dies, she passes on what’s left to Amanda’s grandchildren.

In this case, assets above the GST exemption would have been taxed twice: once when being passed on to Amanda’s daughter, and again when they reach Amanda’s grandchildren.

Now let’s see what would have happened if Amanda had created a generation-skipping trust.

In this scenario, let’s say she transfers $13.99 million—or up to the GST exemption—to the GST.

Amanda’s daughter is allowed to receive income generated from these assets, but not the assets themselves. When Amanda dies, the GST assets are directly transferred to her grandchildren.

But because Amanda used her exemption, no estate taxes are due on the $13.99 million.

Moreover, these assets are shielded from being taxed as Amanda’s daughter’s estate as well.

Other Types of Trusts

A GST is just one possible tool in your estate planning toolbox. There are other types of trust funds that may also give you an upper hand when it comes to estate planning.

Irrevocable Trust: This type of trust is designed to remove assets from your taxable estate for the benefit of another person or people. But because it’s irrevocable, the beneficiaries generally can’t be changed after the trust is created. And you can’t take back assets transferred to the trust. Additionally, assets like investments can continue to grow and generate income within the trust.

Irrevocable Life Insurance Trust (ILIT): An ILIT is designed to own permanent life insurance policies and remove death benefits from your taxable estate. The ILIT insurance premiums are usually paid using a checking account owned by the trust. Proceeds are paid out to the beneficiaries based on the grantor’s wishes. Moreover, an ILIT can maintain a beneficiary’s access to government aid such as Social Security disability income and Medicaid.

Qualified Personal Residence Trust (QPRT): A QPRT lets you transfer a primary residence to an irrevocable trust. This removes the property’s current value and future appreciation from your estate, thereby potentially avoiding estate taxes. You’re allowed to live in the property for a certain number of years before passing it on to beneficiaries.

The Bottom Line

A generation-skipping trust allows wealthy individuals and families to transfer large sums of assets to their grandchildren or great-grandchildren.

By “skipping” their own children, the transfer of assets is only taxed once and only on the amounts that exceed the GST exemption.

This makes it one of several types of trust funds that can be crucial to a well-established estate planning strategy.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.