Creating a trust is one way to make sure your children receive an inheritance. However, you may have grandchildren and want to leave money for them. This is possible through a generation-skipping trust.
This kind of trust can be a useful estate tool in some circumstances. Smart Asset explains some reasons why families create a generation-skipping trust.
Provide for a variety of beneficiaries
While many people use a generation-skipping trust to benefit grandchildren, you do not have to use it only for that purpose. You could designate great-nephews and great-nieces or younger cousins as beneficiaries.
Even non-relatives such as the younger children of your friends may benefit. Anyone younger than you by 37 and a half years is eligible to receive from a generation-skipping trust, provided the person is not your spouse or a former spouse.
Protect an inheritance
Your adult children may be in professions that are more likely to expose them to potential lawsuits. Since a generation-skipping trust is an irrevocable trust, you can shield an inheritance from creditors. Also, if one of your adult children goes through a divorce, a generation-skipping trust can keep the inheritance from claims in a divorce settlement.
Minimize inheritance taxes
If you give an inheritance to your adult children, it could incur inheritance or estate taxes. Your grandchildren will pay these taxes again when they inherit from their parents. By giving your grandchildren an inheritance directly, they only lose money to inheritance taxes once.
Generally, larger estates benefit from avoiding an inheritance tax more than smaller estates. Still, other reasons may make it beneficial for your family to have a generation-skipping trust.