How to Protect Your Grandkids—Not Just Your Kids: The Secret Power of a Generation Skipping Trust

A Thanksgiving Table Full of Grandkids — and the Estate Plan That Protected Them All

It’s Thanksgiving. The dining room is filled with laughter — ten, maybe twelve little feet running around. Your grandkids, full of energy and innocence, pass the gravy boat, ask for seconds, and lean against your knee when they need a hug. You’re watching them, heart full, quietly marveling: you want them to have this kind of stability when you’re gone.

But behind that joy is a quiet worry: What will happen to the wealth you’ve worked so hard to build? Will your children inherit overnight — only to see the money dwindle under taxes or mismanagement? Or worse, could much of what you meant for your grandchildren never reach them because of double estate taxation?

If that thought gives you pause, you’re not alone — and there’s a powerful estate-planning tool that many families overlook: the generation-skipping trust.

What Is a Generation-Skipping Trust (GST)? 

A generation-skipping trust, often abbreviated as GST, is a special type of irrevocable trust designed to pass assets directly to the generation after your children — typically your grandchildren — rather than having those assets go first to your children and then, later, to your grandchildren. In other words, you “skip” a generation for estate tax purposes.

• The trust is usually set up so that it benefits your grandchildren (or “skip persons,” a technical term for those at least 37.5 years younger than you).

• While your children may not receive the principal of the trust directly, they can receive income generated by it (if you choose), giving them support without draining the core assets.

• The idea is to avoid subjecting your assets to estate tax twice — once when your children inherit, and again when they pass to your grandchildren.

Most importantly, when structured properly, a GST can take advantage of your GST tax exemption so that large transfers may avoid or reduce exposure to the generation-skipping transfer tax (GSTT).

Why Grandparents Consider a GST — The Pain Points It Solves

To understand the real value of a generation-skipping trust, it helps to focus on the emotional and financial pain points it addresses — especially for grandparents:

1. Worried about double taxation
   Without a GST, if you pass your wealth to your children and they eventually pass it on, your estate could be taxed again. A GST can shield that wealth so that it lands more fully with your grandchildren.

2. Wanting long-term protection for your legacy
   You don’t just want to give your children a windfall. You want your grandchildren — and perhaps great-grandchildren — to benefit. A GST can be crafted to last for decades, sometimes as a dynasty trust, preserving wealth across generations.

3. Concerns about discipline or maturity
   Maybe you believe your children could make less-than-optimal financial decisions with a large inheritance. By placing assets in a trust, you retain control (through a trustee) over how the money is used, when it’s distributed, and for what purposes (education, health, major life events).

4. Estate planning before tax law changes
   The GST exemption has historically been very high. As of 2025, the GST exemption is $13.99 million per individual. For families with substantial assets, now may be an ideal time to act.

5. Protecting assets from creditors
   Assets in a generation-skipping trust are often shielded from creditors, divorces, or other claims — because the trust itself owns them, not the individuals.

The Mechanics: How a GST Works & How It’s Taxed 

To build a solid estate plan using a GST, it’s critical to understand how it works and how it’s taxed.

1. GSTT (Generation-Skipping Transfer Tax)

   • The generation-skipping transfer tax is a federal tax on transfers (gifts or bequests) made to “skip persons” — usually grandchildren or others two or more generations younger.

   • In 2025, the GSTT rate is a flat 40% on amounts that exceed your GST exemption.

   • The lifetime GST exemption (the amount you can transfer via GST without paying this tax) for 2025 is $13.99 million per individual.

   • Exemption allocation matters: when you fund the trust, you may need to allocate (or “elect”) the GST exemption so that the trust has a favorable inclusion ratio.

   • The “inclusion ratio” determines how much of the trust’s assets will be subject to GSTT when distributions or terminations trigger a tax event.

2. Tax Triggers

   • Taxable Distributions: When the trust makes a distribution to a skip person (e.g., a grandchild), that may trigger a GSTT.

   • Taxable Terminations: When a non-skip person’s interest ends (like when your child passes), and only skip persons remain, GSTT may apply.

   • Careful planning can minimize or manage those triggers — for example, by using inclusion ratio planning and strategic use of your exemption.

3. Trust Structure & Control

   • GSTs are typically irrevocable, meaning once you place assets in, you generally cannot alter the trust’s principal.

   • However, you can design the trust so that:
     a. Your children receive income (but not the principal).
     b. Distributions to your grandchildren (or other skip persons) happen under terms you set — e.g., at certain ages, for specific purposes (education, home purchase), or after key life milestones.

   • You name a trustee (or co-trustees) to manage investments, distributions, and compliance, ensuring your vision carries forward.

4. Asset Types

   • Almost any type of asset can go into a GST: cash, real estate, business interests, family-held companies, investment portfolios, life insurance, etc.

   • Because the trust owns the assets, growth or appreciation happens inside the trust, potentially outside of estate exposure for future generations.

Real-Life Example: Your Thanksgiving Legacy 

Let’s go back to your Thanksgiving table:

Imagine you decide to fund a generation-skipping trust with $8 million of your assets. You allocate your GST exemption to that trust so that it’s GST-exempt (inclusion ratio = 0 for the initial contribution). The trust is irrevocable.

• Your children (the middle generation) are named as income beneficiaries. They receive distributions of income annually — enough to help with expenses, maybe pay for their children’s education, or supplement retirement.

• Meanwhile, the principal remains untouched, growing inside the trust.

• When you pass, the trust stays alive. It’s designed to last potentially for decades (or even in perpetuity in some states, as a dynasty trust) so your grandchildren will receive it later — tax-efficiently.

• As the trust distributes principal (per your instructions) to your grandchildren at certain ages or milestones, it’s structured such that the inclusion ratio is optimized to minimize GSTT.

• On the generations beyond, the trust continues to benefit skip-generation beneficiaries, preserving your legacy in the way you always envisioned.

Result? On that Thanksgiving many years from now, your great-grandkids might be passing around the mashed potatoes — and they’re benefiting from what you built. The wealth didn’t evaporate in taxes; it multiplied under protection.

Risks, Drawbacks, and Things to Watch

A GST isn’t the perfect solution for everyone. Here are some of the most common challenges and trade-offs to weigh:

1. Irrevocability
   Once you fund the trust, you typically can’t change its terms or reclaim the assets. That means lost flexibility.

2. Complexity & Cost

   • Setting up a GST requires experienced estate-planning attorneys and possibly tax advisors.

   • Trustee fees, legal fees, and ongoing trust administration can be substantial — and must be justified by the tax savings and long-term benefits.

   • Calculating and monitoring the inclusion ratio, allocating GST exemption, filing necessary tax returns — it’s not simple.

3. Tax Risk

   • If not properly structured or exempted, distributions or terminations can trigger the 40% GSTT.

   • Changes in tax law could alter the benefit. (Tax policy shifts are always a risk.)

4. Liquidity Needs
   If you need access to those assets later (for medical needs, caregiving, or business), putting millions into an irrevocable trust limits your access.

5. State Law Constraints
   Not all states allow “dynasty” trusts to last forever (perpetual trusts), due to rules against perpetuities.
   Also, state-level estate or inheritance taxes might apply in your state, even if you avoid or reduce federal GST.

How to Decide Whether a GST Is Right for You 

Here are some questions to guide your decision:

1. What is the size of your estate?
   Is it large enough that estate tax (or future generations’ tax) is a genuine concern?

2. How much do you value legacy over liquidity?
   Are you okay locking assets into a trust to preserve them for your grandchildren?

3. Do you want your children to benefit now, or do you primarily care about grandchildren?
   A GST lets children get income while preserving the principal for grandchildren.

4. Are you ready to engage professionals?
   You’ll need an attorney familiar with GSTs, tax counsel, and a trustworthy trustee.

5. Are your goals long-term?
   If you’re building a multi-generational legacy and want the money to stay in the family, a GST can be powerful.

If you answer “yes” to many of these, a generation-skipping trust may be highly beneficial for your estate plan.

Next Steps: How to Set One Up 

1. Talk to an experienced estate-planning attorney — Not all trust attorneys are well-versed in GST planning.

2. Run the numbers — Work with your financial planner to identify how much to fund, how to allocate GST exemption, and what your cash-flow needs are.

3. Design the trust terms — Decide who gets income, who gets principal, when, and under what triggers.

4. Name a trustee — Choose someone (or a professional institution) who will manage the trust according to your vision.

5. Allocate your exemption properly — Make sure you or your attorney file any necessary elections to maximize tax benefits.

6. Review periodically — As tax laws or your family situation changes, revisit your trust and strategy.

Your Legacy, Protected Across Generations 

That Thanksgiving, as you watch your grandkids laugh and grow, you’ll have peace knowing you didn’t just leave a gift — you built a legacy. A generation-skipping trust is more than a tax strategy. It’s a way to preserve love, values, and security across time.

You worked hard for what you have; with thoughtful planning, that wealth can carry forward — sheltering your grandchildren, supporting your children, and creating a foundation for generations you may never meet.

The gratitude you feel in your heart? That could become part of your family’s story for decades to come.