generation skipping trusts

March 24, 2022

John Brennan, Senior Vice-President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts, explains how generation skipping trusts work. He describes how they can help the very wealthy pass assets to their grandchildren.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice-President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today our topic is generation-skipping trusts. Welcome, John.

John Brennan: Hi, John. How are you?

John Maher: Good, thanks. So John, what is a generation-skipping trust?

What Are Generation Skipping Trusts?

John Brennan: Well, first let's start out with one thing. Generation-skipping trust is a creature of the generation-skipping tax. Okay? And the generation-skipping tax is something that evolved from the estate tax.

So, what happened was once upon a time, there was a loophole where the very wealthy could avoid the estate tax by giving money to their grandkids, essentially skipping a generation. Well, guess what? They put a stop to that. And guess how they did that? Used a generation-skipping tax. Okay? So, on a trust where a decedent benefits grandkids rather than kids, the statute is anybody who's 37 and a half years younger than the giver, in this case we'll say trust maker, donor, whichever, they are not a spouse or an ex-spouse. They are subject to the generation-skipping tax. So that's the root. That's where this comes from. Okay?

Generation-skipping trust is similar to many other trusts. It's designed to benefit those younger kids, grandkids, really. Let's use his grandkids. I think that's the most appropriate group. These trusts… and also, John, I'm going to point out, the generation-skipping stuff, this is really the domain of the very wealthy, okay? I don't see it that much. I don't think a lot of practitioners see it that much. The simple reason being is that you have to be very wealthy to say, "Okay, my kids have enough money. I really have to find a new way to give away these millions." You give money to your grandkids, and usually there's a lot of grandkids. So, with these trusts with the pros and cons, the cons are they're irrevocable when you create them. And like I said, they're very high end and they're kind of pricey.

But the thing is, what they are described to do is they're supposed to pass assets down to the next generation. They're going to get assets out of somebody's estate and they will benefit their grandkids. And, the taxes won't hit until a very high threshold, over 11.4 million. But like I said, I don't see these, because they're kind of rare birds. And I'm usually dealing with much more middle class trust recipients.

Also, the other thing about these types of trusts, you can create what's called a dynasty trust. This is a topic for another day, but there are certain jurisdictions. Typically, there's a restraint on trusts with the idea that you cannot have a trust exist in perpetuity and just go on and on and on and on and benefit your issue for lifetime upon lifetime. Because the idea is that it would lock up assets that would be usable by people who are alive and it's a dead hand control. So usually there's what's called the rule against perpetuities, which prevents this type of thing. But a dynasty trust is something that basically is an exception to the rule against perpetuities allowed in certain jurisdictions. And I think that these, if you've really got that much money, that's probably what you're looking at more than a generation-skipping trust.

What Are the Benefits of a Generation Skipping Trust?

John Maher: Right. Right. What's the point of the trust overall, the generation-skipping trust? Why don't people who have that much money, why don't they just give money to each of their grandchildren? Why do they need to put it into a trust?

John Brennan: Well, the trust has the usual aspects of control. It can be run through a trust return. It's a known quantity, I suppose. It's sort of on the trust chassis, so it's another link in the trust chain. And also, with trusts, you have practitioners and providers who are used to them, so you don't have to reinvent the wheel, I suppose.

John Maher: Right. And maybe you're dividing up a certain portion of your assets and you're saying, "Okay, this portion of my estate, this is what's going to be going to my grandchildren and that's going to be divided up amongst them. It's not everything that I have. It's this portion that I have." You just specify that in the trust.

John Brennan: Correct. Right. Yep.

John Maher: And you mentioned that you don't see it that often and it's mostly for the wealthy because most people would..

John Brennan: ..Very wealthy.

Who Uses Generation Skipping Trusts?

John Maher: Yeah. Most people would tend to leave their estate or their assets to their children. In this case, is it because maybe they have another trust that's benefiting their children and then this one is specifically set up to skip the generation and go for the grandchildren? What's the difference there?

John Brennan: Well, the big consensus is most people want to help their kids out. Okay? Certainly most of our clients, they just want to help their kids specifically. When we get to grandkids, in fact, when we talk about grandkids, I think the appropriate context is going to be Totten trusts. That's where I see a lot of little trusts for grandkids, which are in the thousands. I mean, these generation-skipping trusts, these are vehicles. The threshold on these, these become taxable once you hit over $11 million. We're really talking about sort of Rockefeller type money in this type of context. The Totten trust, that's much more ... We'll have a fun conversation about that when we get there.

Contact Cape Ann for More Information About Generation Skipping Trusts

John Maher: All right. Well, that's really great information, John. Thanks again for speaking with me today.

John Brennan: Sure. Thank you, John. Any time.

John Maher: For more information, you can contact Cape Ann Savings Trust and Financial services at (978) 283-7079, or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.