For many families, building wealth is only half the mission. The other half — just as important — is protecting that wealth for future generations.
A generation-skipping trust (GST) may be one of the most effective planning tools for passing assets down the family line. It helps to minimize taxes and ensure long-term financial stability. Let’s look at how.
Estate tax
Not only do you have to pay taxes while you’re living, but the federal government also taxes your assets when they are passed on after you die. A primary advantage of a GST is the ability to reduce or avoid federal estate taxes entirely. Usually, wealth is transferred from parent to child, then from child to grandchild, and is taxed at each step. With a GST, assets can “skip” a generation and avoid additional estate taxes through the GST tax exemption, which is currently $13.99 million per individual (set to drop to $7 million after December 31, 2025).
For Connecticut residents, a GST is a valuable strategy because the state is one of the few with its own estate tax. While the GST doesn’t directly allow people to avoid state estate tax, a smart transfer strategy can help minimize exposure. Combined with other estate planning tools, state-level taxes can be reduced while ensuring that assets in the GST are sheltered at the federal level.
Asset protection
A common concern among older family members is that inherited wealth is often vulnerable to poor financial decisions and overspending. A GST allows you to set the conditions on how and when beneficiaries may receive the money. You can help ensure assets are used for approved needs such as education.
A well-designed GST also offers significant asset protection benefits. Since the assets belong to the trust and not the beneficiary, they are typically shielded from:
- Creditors
- Lawsuits
- Divorce settlements
- Bankruptcy
This helps to protect the family’s wealth from unexpected legal or financial troubles that the children or grandchildren may encounter.
Another advantage of a GST is that it keeps assets out of probate. The distributions aren’t delayed, and they keep private family information from becoming public.
Setting up a GST can be complex. Working with a legal professional helps ensure compliance and customization to meet your goals.