How can I use a generation-skipping trust to reduce the estate taxes my family owes?

You’ve reached a level of financial success, and you want to enjoy it. And, you’d like your children and grandkids to enjoy it too. What steps can you take to make sure your wealth stays in the right hands? Of course, it starts with proper estate planning.

For those with a high net worth, estate taxes can take a decent chunk out of the assets you leave for your heirs. Especially if you have children, grandchildren, and great-grandchildren you want to provide for – the estate tax owed with each generational transfer can add up. But, there are estate planning tools that can help: namely, the generation-skipping trust and dynasty trust.

A Generation-Skipping Trust (GST) is a type of irrevocable trust. Just by reading the name, you can assume what a generation-skipping trust does: it makes your assets skip the immediate next generation, and go straight to the second. So, rather than going to your own children, assets go straight to your grandchildren.

This might seem odd – why not set up a normal trust? What’s the purpose of a generation-skipping trust?

You’re probably familiar with estate taxes. The advantage to a generation-skipping trust is that estate taxes are only owed by the beneficiaries who receive the trust’s assets, whereas normally an estate tax is owed by each generation with their inheritance.

Estate taxes vary from state to state (see diagram). As you can see, neither California nor Idaho has an estate tax at the state level. However, there is a federal estate tax. For 2025, estate taxes are owed if the gross estate of the decedent is over $13.99M (or $27.98M for married couples).

So, who would use a generation-skipping trust? GSTs are ideal for high-net-worth individuals and families who want to:

• Reduce estate and gift taxes for their heirs.

• Protect and preserve their wealth over multiple generations.

• Maintain control over how their assets are distributed.

When establishing the trust, you will choose a trustee and beneficiaries. The trustee is who distributes the assets to your beneficiaries based on your instructions. In a generation-skipping trust the beneficiaries are normally your grandchildren, but they don’t have to be.

The beneficiaries can be more distant generations. Or, if you don’t have grandchildren but have other loved ones – the recipient can be any person at least 37.5 years younger than you.

When assets are transferred, in addition to the regular estate tax, the beneficiaries will also owe the generation-skipping transfer tax (GSTT). This was put in place because of the GST loophole.

Generation-skipping transfer tax is a 40% tax. 40% can feel high but through proper planning, the tax burden can be minimized.

For high-net-worth families who want to engage in multi-generational financial planning, GSTs can help protect your family from being taxed over and over again so that your wealth stays in your family.

While generation-skipping trusts can be an effective strategy, dynasty trusts are also worth considering. Dynasty trusts are focused on longer term wealth preservation.

They are designed to last for multiple generations. Unlike a GST where assets are skipped then transferred, in a dynasty trust, assets are continuously passed down.

Dynasty trusts are usually used by ultra high-net-worth families. One might be worth considering if you want to:

• Keep family wealth across multiple generations.

• Minimize ongoing estate tax liabilities for heirs.

• Establish a long-term wealth distribution plan.

• Protect assets from threats (i.e. lawsuits and divorces).

When creating a dynasty trust, it’s important to choose an established and reliable trustee, and understand the regulations that need to be followed. Since a dynasty trust is meant to be long term, the trustee is usually a professional fiduciary or institution instead of an individual.

After it’s established, a dynasty trust is like a long-term financial entity. Assets are distributed to future generations based on what’s outlined in the trust.

When distributed, assets technically stay in the trust rather than being transferred (and belonging) to each individual beneficiary. Because of this, they avoid estate taxes that would otherwise be owed by each successive beneficiary.

If income-producing assets are in the trust, beneficiaries will owe income tax when they receive distributions. So, assets in the trust are usually non-income producing, like tax-free bonds.

The GSTT does apply to dynasty trusts, only when the transfer is made (and when it is over the threshold amount).

Dynasty trusts and generation-skipping trusts can both be implemented as powerful estate planning tools. While a GST has clearly outlined tax benefits for one generation with the skip, a dynasty trust helps to establish long-term, multi-generational wealth preservation.

As always, we recommend working with a tax professional who understands both tax strategies and wealth management.

Author: Rob Cucchiaro, CFP®, CRPC, AAMS

Questions answered in this article:

• What is a generation-skipping trust?

• Is a generation-skipping trust a revocable or irrevocable trust?

• What’s the purpose of a generation-skipping trust?

• Which states have an estate tax?

• Does Idaho have an estate tax at the state level?

• Does California have an estate tax at the state level?

• Is there a federal estate tax?

• How will I know if I owe an estate tax?

• Who would use a generation-skipping trust?

• In a generation-skipping trust, does the beneficiary have to be my grandchildren?

• In a generation-skipping trust, can the beneficiary be my great-grandchildren?

• Does the recipient of a generation-skipping trust have to be a family member?

• How much younger does someone have to be to be the recipient of a generation skipping trust?

• How does a generation-skipping trust work in Idaho?

• How does a generation-skipping trust work in California?

• How does a generation-skipping trust fit into financial planning?

• What is a dynasty trust?

• Who would use a dynasty trust?

• How does a dynasty trust work?

• What is the generation skipping transfer tax?

• How do assets in a dynasty trust avoid estate taxes?

• Are the assets in a dynasty trust subject to income tax?

• What is the difference between a generation-skipping trust and a dynasty trust?

• How can I use a generation-skipping trust to reduce the estate taxes my family owes?

• How can I use a generation-skipping trust to reduce the estate taxes my family owes in Idaho?

• How can I use a generation-skipping trust to reduce the estate taxes my family owes in California?