Are Generation-Skipping Trusts Right for You? Potential Drawbacks to Consider

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Attorney

Since 2021, Hunter has been dedicated to providing superior estate and business planning services to his community. His real-world experience in family dynamics, business disputes, and estate planning challenges gives Hunter an abundance of experience, wisdom, and skill in planning for legacies of all sizes and circumstances.

Published on Apr 14, 2025.

If you’ve amassed significant assets during your lifetime, you likely want to preserve that wealth for future generations. However, depending on the kinds of assets you want to pass down, transferring wealth may result in a significant tax liability. Creating a trust might be the best way to maximize the tax efficiency of any transfer of family wealth.

There are far more types of trusts than many people realize. The best way to determine which type meets your financial objectives is to work with an estate planning attorney and a financial advisor. That said, generation-skipping trusts can be a powerful estate planning tool for people of considerable means.

If you’ve been researching ways to preserve your family wealth for future generations, you may already be familiar with generation-skipping trusts and their benefits. When making a decision about your family’s financial future, however, you should do more than just review the advantages of each option — you should also be aware of all possible disadvantages.

In this post, we’ll be taking a look at some of the disadvantages of generation-skipping trusts and how to decide whether creating one is the right option for your family.

What Is a Generation-Skipping Trust?

A generation-skipping trust (GST) is an estate planning tool that allows assets to pass straight from a grantor (the creator of the trust) to their grandchildren (or anyone more than 37.5 years younger than the grantor). Because the assets in the trust skip over the grantor’s children, the assets in the trust are taxed once instead of twice.

There are a number of reasons why many grantors, particularly those with large estates, choose a generation-skipping trust to transfer assets and preserve wealth. For instance:

The trust protects assets for two or more generations instead of one
Because the trust is separate from the grantor’s estate, its assets generally can’t be seized by creditors
Instead of paying estate taxes when wealth is transferred to children and then to grandchildren, the trust pays estate taxes only once
Through careful use of the GST exemption, grantors can limit overall tax liability

It’s important to understand that while the grantor’s children don’t control the assets in the trust, that doesn’t mean they can’t benefit from them. In many cases, the children of the grantor can be given the income generated from the assets held in trust.

Generation-Skipping Trust Rules and Regulations

Broadly speaking, large estates tend to be more complicated to manage than smaller estates. Many grantors who create generation-skipping trusts are passing down substantial assets, and fittingly, there’s a complex suite of rules and regulations to go along with these trusts.

Here’s a look at some of the primary regulations governing generation-skipping trusts.

Generation-Skipping Trusts Are Irrevocable

By definition, generation-skipping trusts are irrevocable, meaning they cannot be modified after creation. While irrevocable trusts don’t offer the same flexibility as revocable trusts do, they’re your best option when it comes to asset protection and minimizing your tax burden.

In exceptional circumstances, an irrevocable trust may be modified by a court order, but you shouldn’t count on this being a future option.

Not Everyone Can Be a Beneficiary

In many cases, grantors who create generation-skipping trusts do so to benefit their grandchildren. However, the beneficiary of the trust doesn’t have to be a grandchild or even a relative. They simply must be more than 37.5 years younger than you are.

If you do create a generation-skipping transfer trust that will ultimately benefit your grandchildren, you should be aware of a potential complication.

Imagine you have a living adult child and two grandchildren. If your adult child dies before you do, there is no longer a generation to “skip” between you and your grandchildren. As a result, the trust must be terminated, and generation-skipping transfer tax immediately becomes due. This is known as a taxable termination.

The GST Exemption Is Changing

A generation-skipping transfer tax is assessed on trusts valued over a certain amount. This tax is separate from the lifetime gift and estate tax exemption.

Thanks to the 2017 Tax Cuts and Jobs Act, the GST exemption for 2025 is $13.99 million, the same as the exemption for estate and gift taxes. This means that generation-skipping taxes apply only to trust assets exceeding $13.99 million.

However, you may already know that, like the gift and estate tax exemption, the generation-skipping transfer tax exemption is set to “sundown” at the end of 2025. The Tax Cuts and Jobs Act temporarily raised exemptions, but starting on January 1, 2026, exemptions are set to revert to their previous levels.

Generation-skipping trust tax exemptions (as well as gift and estate tax exemptions) are indexed for inflation, meaning they go up each year to account for inflation.

In 2021, these exemptions were set at $5 million and then indexed for inflation over the following years. When the GST exemption sundowns at the end of 2025, the exemption amount indexed for inflation should be about $7 million.

Transfers Are Taxable

When the trust pays a distribution to a beneficiary, that distribution is taxable, meaning gift and estate taxes apply. However, if you’ve allocated your GST exemption so it completely covers the assets paid to the beneficiary, there may be no tax due.

Each year, you have the opportunity to select which specific trust assets to apply the GST exemption to. This is known as “allocating” your exemption. Fortunately, if you forget to allocate your exemption, you can still reap tax benefits, although they might not be the same ones you intended.

If you don’t allocate your exemption on a gift tax return, automatic allocation applies. This means that the government applies the exemption to the trust automatically.

Three Types of Events Trigger Generation-Skipping Transfer Tax

There are three primary events that may require you to pay generation-skipping transfer tax immediately:

Direct Skip: Assets are transferred to a beneficiary, and the grantor either uses the GST exemption or pays the taxes themselves
Taxable Distribution: A beneficiary receives assets, but since they didn’t use their GST exemption or pay the taxes, those taxes are paid by the beneficiary
Taxable Termination: The trust is terminated, and the trustee pays the tax

Several different events can lead to a taxable termination. Often, generation-skipping trusts are dissolved because of the death of a beneficiary, depletion of assets, or the end of the timeframe specified in trust documents.

Disadvantages of Generation-Skipping Trusts

Talking about death is rarely pleasant. The same could be said of talking about money. Because estate planning can be an uncomfortable topic, some families try to limit their discussion of estate planning strategies as much as possible.

However, avoiding talking about your estate plan is a mistake. When you discuss your options with the rest of your family, as well as your attorney and financial advisor, you’ll be well-equipped to make the right decisions for current and future generations.

If you’re considering a generation-skipping trust, it’s particularly important to think about and discuss these common generation-skipping trust disadvantages:

Generation-Skipping Tax Can Be Substantial

If your trust doesn’t exceed the generation-skipping transfer tax exemptions, this generally isn’t something you’ll need to worry about. However, if you have a very large estate, it’s worth taking a look at the numbers (or asking your financial advisor to) and determining whether a generation-skipping trust actually offers substantial tax benefits.

Generation-Skipping Trusts Are High Maintenance

As estate planning tools go, generation-skipping trusts are quite complicated. If you incorporate one into your estate plan, it’s generally recommended that you consult both an estate planning attorney and a financial advisor.

However, the challenges that come with a generation-skipping trust don’t end once it’s established. You’ll need a trustee to oversee the trust, file tax forms, and provide accurate accounting services.

This may not seem like a substantial expense at first. However, when you consider the fact that generation-skipping trusts are intended to last for at least two generations, it’s easy to see how administrative costs can add up over time.

You Generally Can’t Change a GST Once It’s Been Established

Except in very rare circumstances, you can’t change an irrevocable trust once it’s been created. While the trust can’t change, however, tax laws and your family’s circumstances can. It’s possible that your family may end up stuck with a trust that doesn’t adequately meet everyone’s needs.

Younger Beneficiaries Might Count on an Inheritance

If you’re considering creating a generation-skipping trust, you likely want your grandchildren to be supported in the future. You also probably want them to develop successful careers and learn essential financial skills.

Many people who inherit large sums of money are still motivated to find success independent of familial wealth. However, if your grandchildren grow up knowing they’ll receive a given sum of money at some point, they may decide they’d rather wait for a payout than develop valuable career or life skills.

Your Family Might Experience Conflict

In most cases, you can configure a generation-skipping trust in a way that still provides assets to your children. Often, grantors allow their grandchildren to inherit trust assets while letting their children have any interest earned from those assets.

However, even if your adult children receive assets similar in value to what younger beneficiaries receive, they may be bitter or resentful of the fact that the trust skips over them entirely.

This scenario is more likely if your children thought they would inherit your wealth growing up — and then found out that most of your estate was actually going to your grandchildren.

When a Generation-Skipping Trust Might Not Be the Best Option

Any estate planning lawyer can tell you that there’s a whole world of estate planning tools at your disposal. When you’re creating your estate plan, you should try to avoid becoming so attached to one option that you don’t notice others that may be better for your family.

It’s important to note that estate planning is highly individualized, so you should always discuss the implications, costs, and benefits of your plan with your attorney. Generally speaking, however, a generation-skipping trust may not be ideal in the following scenarios:

Your Children Are in Immediate Financial Need

The money in your estate is yours to use as you see fit. However, if your children are struggling financially or you anticipate that they may be in the near future, skipping over them to give money to your grandchildren may be impractical and unfair.

If your adult children could use the money to improve your grandchildren’s quality of life growing up, it may make more sense to pass the funds on to your children after your death.

You Have a Small Estate

Technically, anyone who wants to can set up a generation-skipping trust. However, because of the considerable cost of establishing and maintaining them, these trusts usually only make financial sense if your estate is very large.

For the sake of illustration, imagine that the entirety of your estate is well below the federal gift and estate tax lifetime exemption.

You might pass your estate on to your children without incurring estate tax, even without a trust. You’re free to create a generation-skipping trust, but because you have no estate taxes to save money on and GSTs are costly to maintain, you’ll likely end up losing money.

You Think Your Grandchildren May Not Be Responsible Enough

For many grantors of generation-skipping trusts, their grandchildren are still minors when they create the trust. Responsible children can grow up to be irresponsible adults. Conversely, rowdy, undisciplined kids can grow up to be extremely smart with their money.

Chances are that you want your hard-earned money to help improve your grandchildren’s lives. If you’re concerned that future beneficiaries might squander their inheritance, creating a generation-skipping trust may not be the best choice.

If you want to leave your grandchildren money but are concerned about their ability to manage it, something like a spendthrift trust may be a better choice. With these trusts, you outline a set of rules for how and when assets may be distributed to the beneficiary. Upon your death, a trustee is put in charge of enforcing those rules.

Your Family Relationships Are Already Strained

Generation-skipping trusts can create tension and resentment. If your family relationships are close and largely healthy, you may be able to discuss the benefits of a GST and overcome your differences. However, if your family relationships are already strained, adding a generation-skipping trust may only cause them to deteriorate further.

If you have concerns about your existing family relationships and how a generation-skipping trust might impact them, it’s worth discussing your feelings with your estate planning lawyer.

Your attorney may have previously worked with a family with a similar dynamic. If so, they may be able to offer guidance on how to handle this potentially delicate situation.