Legal Definitions - generation-skipping trust

A generation-skipping trust is a type of trust that allows individuals to transfer assets to their grandchildren or other younger generations without incurring estate and gift taxes. This type of trust is often used to pass on wealth to future generations.

For example, if a wealthy individual wants to leave a large sum of money to their grandchildren, they can create a generation-skipping trust to do so. This allows them to avoid paying estate and gift taxes on the transfer.

However, it's important to note that the generation-skipping transfer tax was enacted to prevent individuals from avoiding taxes through these types of trusts. As a result, generation-skipping trusts are no longer as beneficial for tax purposes as they once were.

Despite this, some individuals still use dynasty trusts as a way to transfer wealth to future generations without incurring the generation-skipping tax.