Generation Skipping Trust

A generation skipping trust is designed to allow your children and grandchildren to benefit from your assets in a way that avoids or reduces estate taxes.  If you leave assets directly to your children with the intention that they will use them during their lifetimes and then pass along the remaining assets after their deaths to their children (your grandchildren), the assets may incur unnecessary estate taxes; The remaining assets may incur estate taxation because they will be included in your children's estates when they pass. 

An alternative is to create a trust very similar to a credit shelter trust called a generation skipping trust that will allow your children to benefit from the trust assets during their lives with the remaining assets going to your grandchildren tax-free at the death of your children.  Since the assets are owned by the trust and not your children, they will not be included in your children's estates at their deaths and will not be subject to estate taxes.  Avoidance of estate taxes at your children's generation will result in more assets being available to your grandchildren.  Even though your children will not technically own the assets, they can have the benefit of the use of them (e.g., a vacation home), receive all income generated by the assets and even invade the trust principal for such things as health, education, maintenance and support.