Grandparents can help reduce the impacts of estate taxes on their family’s wealth through generation-skipping trusts. In Florida, these trusts can allow you to pass assets and money directly to grandchildren.
Generation-skipping trusts are considered complicated financial and legal terrain and should always be created with the assistance of an estate planning lawyer.
This guide will give you a clear understanding of generation-skipping trusts to get the ball rolling.
What Is a Generation-Skipping Trust?
- Generation-skipping Trusts (GSTs) are types of trusts where the grantor’s assets pass down to grandchildren, skipping a generation of children.
- The main benefit of generation-skipping trusts is that assets bypass the estate taxes that would typically apply to assets inherited directly by children.
- GSTs are common amongst families looking to protect their wealth from expensive estate tax hits.
- Generation-skipping trusts are irrevocable trusts which cannot be amended once created.
- Ideally, a GST should be created as early as possible, often during retirement planning, as they’re complicated legal entities.
- They should always be created with the help of an estate planning attorney.
Generation-Skipping Trusts in Florida
How do They work?
In Florida and most of the U.S., generation-skipping trusts require specific criteria to be met. The beneficiary must be:
“A natural person assigned to a generation which is 2 or more generations below the generation assignment of the transferor.”
The grantor’s children (the skip persons) never take title to the assets, so the usual estate taxes don’t apply.
Who Can Be a Beneficiary in a Generation-Skipping Trust?
Grandchildren are the most common GST beneficiaries, but anybody at least 37 1/2 years younger than the grantor can be a beneficiary – even if they are not a family member. However, they cannot be a spouse or ex-spouse of the grantor.
For example, a beneficiary in a GST could be:
- A grandchild
- A great-grandchild
- A niece or nephew
- A friend who is 37 1/2 years younger than the grantor
Benefits for Skip Person
A skip person (the skipped child) can still gain financial benefits as the grantor can provide access to any income the trust’s assets generate.
Generation-Skipping Trust Taxes
Since 1986 there has been a Federal generation-skipping transfer tax, in response to the using a GST to avoid federal estate taxes.
These tax rates have fluctuated over time, from between 55% to 0%.
Today, there is a permanent $5 million tax exemption on generation-skipping transfers. Therefore, only the super-rich are likely to face the taxes. Most people will never face GST taxes due to the high threshold. As of 2022, the lifetime exemption is $12.06 million but will drop to around $6.2 million by 2026 – unless tax laws change.
Even with GST taxes, high-net-worth families can still benefit from these trusts to transfer wealth at lower tax rates.
Think of it this way: You effectively miss a round of inheritance and estate taxes with a generation-skipping trust. If you were to pass assets and wealth to your children, your family would be taxed after your death and your children’s death.
But bypassing it directly to your grandchildren, you will miss a round of tax.
Anyone considering taxes in their estate planning should always speak to a reputable Florida estate planning attorney specializing in transfer tax planning. The text provided here is for reference and should never be used to make decisions without consultation.
Florida’s Estate Taxes
Florida residents are fortunate when it comes to GSTs. Florida does not have a separate estate tax estate inherited after someone passes away or a state income tax.
As the federal government doesn’t consider inherited property as income for federal tax purposes, Florida residents will not pay taxes on these distributions.
Put simply, the ‘skip person’ will benefit from the trust’s assets ‘ tax-free’.
When to use a Generation-Skipping Trust in Florida?
- Individuals with large estates vulnerable to sizable federal estate tax hits are common users of generation-skipping trusts in Florida. They can be extremely useful for capital preservation.
- Note that irrevocable trusts cannot be amended once they are created – so you can’t take assets and money out as the grantor once they’re added.
- Generation-skipping trusts aren’t usually used for smaller estates. Although you can, your family will likely benefit from other trusts such as regular irrevocable trusts or living trusts.
How to Create a Generation-Skipping Trust in Florida?
- Generation-skipping trusts are complicated. You must fill out various legal documents, which state information such as how and when the money will pass to the next generation, which assets will be placed in it and many other important details.
- Next, the money will be placed into an escrow, owned by the trust and only released by the trust’s executor at a determined date or once the required conditions are met.
- Executors of trusts such as these are usually those with strong legal knowledge, such as financial advisors or estate planning lawyers.
- It is possible to create a generation-skipping trust online, but it’s not advised. Without working with an attorney, you may overlook crucial details that either invalidate the trust or see you miss out on money-saving estate planning steps.
- To find a reputable estate planning attorney, work with a highly rated, long-standing law firm such as Battaglia, Ross, Dicus & McQuaid, P.A.
Contact a Florida Estate Planning Attorney for Generation-Skipping Trusts Today
If you’re interested in creating a generation-skipping trust to help protect your family’s wealth, minimize the impacts of tax or avoid probate, then our Florida estate planning attorneys can help.
We regularly help grandparents and wealthy individuals keep their capital and assets in the family, by setting up trusts that use legal loopholes and well-structured legal entities.
Battaglia, Ross, Dicus & McQuaid, P.A. is U.S. News and World Reports Tier 1 law firm in Florida, specializing in Estate Planning & Probate since 1958. With award-winning experienced estate planning attorneys, they can help you create a trust to avoid complications for your family after your death.