How a Generation-Skipping Trust Works

Many grandparents want to give money directly to their grandchildren without involving their parents. A popular solution is to use a generation-skipping trust This type of trust allows the grantor to set the terms as well as avoid paying additional taxes in order to first transfer the money through the beneficiaries’ parents. In general they’re a good idea but there are a few details you’ll need to consider before starting one.

A financial advisor can help you start a trust, designate beneficiaries, and navigate other aspects of estate planning.

What Is a Generation-Skipping Trust?

A generation-skipping trust is just what it sounds like. It’s a legally binding trust that skips over the generation right below the person creating it and goes to the next one. Essentially, it skips your kids and passes directly to their kids, your grandchildren. The money in this trust is never officially owned by the generation it is skipping; it passes directly to the following generation instead.

Blood relation is not necessary for a generation-skipping trust to work. You can designate anyone who is at least 37.5 years younger than you, and who also isn’t your spouse or ex-spouse, to receive distributions from a generation-skipping trust. If that’s someone who isn’t actually your grandchild, perhaps a friend or great-nephew or niece, that works just as well.

How Generation-Skipping Trusts Are Taxed

While the emotional appeal of providing for grandchildren is important, the primary reason many families use a generation-skipping trust is to reduce exposure to multiple layers of transfer taxes. For 2026, the federal estate tax exemption is $15 million per individual. Some states also impose their own estate taxes, often with lower exemption thresholds. These taxes apply at death, before assets are distributed. A handful of states also levy inheritance taxes, which are imposed on the recipient after assets are received. There is no federal inheritance tax.

By using a generation-skipping trust, families can potentially avoid estate taxation at the children’s level. If assets pass first to children and later to grandchildren, and the estate remains large enough, those assets could face the estate tax twice. A properly structured generation-skipping trust allows assets to bypass the children’s estates, preventing additional tax liability.

For federal purposes, generation-skipping trusts are tied to the generation-skipping transfer (GST) tax exemption, which is aligned with the estate tax exemption. In 2026, an individual can generally allocate up to $15 million to a generation-skipping trust without triggering GST tax. Married couples can combine exemptions, allowing up to $30 million to be sheltered when structured correctly.

Any amount placed into a generation-skipping trust above the available GST exemption is subject to the generation-skipping transfer tax, which is assessed at a flat 40% rate. Because of this steep tax, generation-skipping trusts are typically most useful for estates large enough to take full advantage of the exemption but not so large that significant assets would fall into the taxable range.

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When to Use a Generation-Skipping Trust

A grandfather considers a generation-skipping trust for his granddaughter.

If you have an especially large estate, one that is likely to be subject to the federal estate tax and where your children could also face estate taxes in the future, a generation-skipping trust may be a useful tool for preserving generational wealth. The primary benefit is reducing or eliminating one layer of estate taxation as assets pass from one generation to the next. It’s important to remember that these trusts are typically irrevocable. Once assets are transferred into the trust, you generally cannot take them back, so the decision should be made with long-term certainty.

For example, imagine a grandparent with a $25 million estate. If the assets pass first to their children and then later to their grandchildren, the estate could potentially be taxed at both transfers if values remain high. By placing a portion of those assets into a generation-skipping trust for the grandchildren, the grandparent may avoid estate taxation at the children’s level, allowing more of the wealth to remain within the family over time.

On the other hand, a generation-skipping trust is usually unnecessary for smaller estates that are unlikely to exceed estate tax exemption thresholds. While it is possible to use one for non-tax reasons, the added complexity and cost often outweigh the benefits in those cases.

How to Create a Generation-Skipping Trust

A generation-skipping trust is a complex legal arrangement that must be drafted carefully to specify who receives income, who ultimately receives principal and under what conditions distributions occur. Establishing the trust involves creating formal legal documents, selecting a trustee and transferring assets into the trust so that it, rather than you personally, becomes the legal owner. The trustee then manages and distributes the assets according to the terms you set.

For example, a grandparent might work with an estate planning attorney to create a trust that pays investment income to their children for life, while designating the grandchildren as the final beneficiaries of the remaining assets. The trust document would outline distribution percentages, timing and any restrictions, such as age requirements or education-related uses.

Although online tools exist for creating trusts, working with experienced professionals is often preferable. An attorney can draft and review the legal documents, while a financial advisor can help determine which assets to place into the trust and how the trust fits into your broader estate and tax strategy.

Potential Drawbacks of a Generation-Skipping Trust

A generation-skipping trust can offer meaningful estate tax advantages, but it is not a universal solution. One of the most significant tradeoffs is permanence. These are usually irrevocable trusts, meaning that once assets are transferred, the grantor typically cannot reclaim them or change the fundamental structure of the trust. This makes careful planning essential before moving forward.

Flexibility is another concern. Family dynamics, financial priorities and personal circumstances can change over time. A trust established decades earlier may no longer reflect current wishes, yet modifying its terms can be difficult or, in some cases, impossible without court approval. This lack of adaptability can be a drawback for individuals who anticipate evolving goals.

Cost and administrative burden should also be considered. Creating a generation-skipping trust usually requires specialized legal drafting, and ongoing management may involve trustee fees, accounting costs, and periodic tax filings. For families whose estates are unlikely to face estate taxation at multiple generational levels, these expenses may outweigh the potential benefits.

There is also the issue of liquidity and access. Assets placed into the trust are no longer directly available for the grantor’s personal use. If future needs arise, such as unexpected medical expenses or long-term care costs, having a large portion of wealth locked inside a trust could create cash-flow challenges.

Finally, a generation-skipping trust can affect relationships within a family. Skipping over children in favor of grandchildren may lead to misunderstandings or resentment if expectations are not clearly communicated. Considering these potential drawbacks alongside the advantages can help determine whether this strategy aligns with both financial and personal objectives.

Bottom Line

A generation-skipping trust is a useful tool for those with especially large estates. It allows you to give money directly to younger friends or family members, saving your family some estate tax payments down the line. Up to $15 million per person is subject only to the estate tax, while any funds greater than that amount are also subject to an additional 40% tax. A financial advisor specializing in trust and estate planning can help you set up a generation-skipping trust.

Tips For Estate Planning

Estate planning can be hard. Finding the right financial advisor who fits your needs doesn’t have to be, though. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When writing a will, don’t forget to include someone to take care of your kids. You want to be prepared, even if you hope it won’t be needed.