I often meet with clients who have built a significant business or real estate portfolio over a lifetime. Their first instinct is to leave everything to their children. But then a question arises—what happens next? What if they want to provide for their grandchildren, or even great-grandchildren, without that legacy being diminished by a second round of estate taxes when their own children pass away?
This question is the gateway to the Generation-Skipping Trust (GST). It’s not about disinheriting your children. It’s about being an intentional, long-term steward of your family’s legacy. It is a deliberate plan to ensure the foundation you built supports not just the next generation, but the one after that as well.
What a Generation-Skipping Trust Actually Does
The name is a bit of a misnomer. While the trust’s ultimate beneficiaries are “skip persons”—typically grandchildren—your children are not usually cut out of the picture. A properly structured GST can provide for your children during their lifetimes. They can receive income from the trust, and a trustee can have discretion to make principal distributions for their health, education, or support.
The core purpose of the GST is to insulate the trust assets from being included in your children’s taxable estates when they die. By placing assets in a trust, you ensure they pass directly to your grandchildren without being subject to another layer of federal estate tax. This is where the “skipping” occurs—it skips the child’s taxable estate, preserving capital that would otherwise be lost to taxes.
This is a powerful tool for generational wealth preservation, but it is governed by a specific and unforgiving set of federal tax rules.
The GSTT Exemption: The Heart of the Strategy
The federal government is well aware of this planning technique. To regulate it, Congress enacted the Generation-Skipping Transfer Tax (GSTT). This is a separate tax—currently at a flat 40% rate—levied on transfers to skip persons, in addition to any applicable gift or estate tax. It is a punitive tax, designed to replicate the estate tax that would have been paid at the child’s generation.
However, every individual has a lifetime GSTT exemption. For 2024, that amount is $13.61 million. This is the crucial number. By creating a GST and allocating a portion of your exemption to the assets you place inside it, you shield those assets—and all their future growth—from the GSTT forever. The rules governing this tax are laid out in Chapter 13 of the Internal Revenue Code (26 U.S. Code §§ 2601-2664).
Properly allocating this exemption is an irrevocable, critical step. A misstep here can undo the entire purpose of the trust, exposing a family to millions in unnecessary taxes decades down the road. This is not a clerical task; it is the central strategic act in creating a lasting legacy.
The Fiduciary Duty of a Trustee
A GST is not a “set it and forget it” document. It is a living entity that may last for many decades. The choice of a trustee—the person or institution charged with managing the trust—is one of the most important decisions you will make. A trustee is a fiduciary, held to the highest standard of care under New York law.
Their duties include:
- Prudent Investment: Under New York’s Prudent Investor Act (EPTL § 11-2.3), the trustee must manage the trust’s assets responsibly, balancing the need for growth with the preservation of capital.
- Impartiality: They must balance the needs of the current beneficiaries (your children) with the interests of the future beneficiaries (your grandchildren). This can be a difficult tightrope to walk, especially if the trustee is a family member.
- Meticulous Record-Keeping: The trustee is accountable to the beneficiaries and, if necessary, to the Surrogate’s Court for every decision made.
We often counsel clients in Manhattan and across the state to consider a professional or corporate trustee, either alone or alongside a trusted family member. An institutional trustee brings impartiality and expertise, ensuring the trust is administered according to your original intent and in compliance with the law, long after you are gone.
A GST is an instrument of profound stewardship. It reflects a commitment not just to your children, but to the long-term prosperity and security of your entire family. It requires foresight, careful drafting, and a deep understanding of both tax law and family dynamics.
If you are considering how to structure a legacy that will span multiple generations, the first step is to clarify your objectives. We can schedule a meeting to review your family’s specific circumstances and determine whether a Generation-Skipping Trust aligns with your vision for the future.
