The estate tax is much-maligned in some quarters because of the fact that it is imposed on resources that have already been taxed. After all, your savings and investments were accumulated with the money that you were able to hang onto after you paid taxes on your income. But to make matters worse, there can be multiple impositions of the estate tax on the resources that you leave behind to your loved ones.
Simply put, if you leave a taxable sum to your children and they keep it intact or build on it throughout their lives, this inheritance will be taxed yet again when they pass it along to your grandchildren. This can potentially go on and on, presenting a steady form of asset erosion.
As a response you could choose to create a generation-skipping trust. When you are working with a qualified estate planning attorney to draw up the trust agreement you name your grandchildren as the beneficiaries rather than your children, skipping a generation as it were. Your grandchildren inherit the assets after the passing of your children, and the generation skipping transfer tax is applicable.
However, your children are not completely left out in the cold while they are alive. They can benefit from the trust’s resources without actually owning them so in the end, two generations were able to enjoy benefits from the trust while being subject to just one instance of taxation.
Generation-skipping trusts also provide asset protection, and this is another reason why they hold appeal to many individuals. Since the children don’t personally own the assets in the trust they cannot be targeted by former spouses and other claimants.