Building generational wealth requires more than accumulating assets—it demands a thoughtful legal strategy to ensure that wealth passes intact to the people you love most. For New York families with substantial estates, a Generation Skipping Trust (GST) can be one of the most powerful tools available to preserve assets for grandchildren, great-grandchildren, and future descendants while minimizing transfer tax exposure. Working with an experienced New York generation skipping trust attorney is essential to design, fund, and administer these sophisticated trusts in compliance with both federal tax law and New York's unique estate planning statutes.
What Is a Generation Skipping Trust?
A Generation Skipping Trust is an irrevocable trust designed to transfer wealth to beneficiaries who are at least two generations younger than the trust's settlor, typically grandchildren or more remote descendants. By structuring the trust to "skip" the children's generation for transfer tax purposes, the assets avoid being taxed twice: once when passing from parent to child, and again when passing from child to grandchild.
While the term "generation skipping" suggests that children are excluded, that is not necessarily the case. A well-drafted GST can provide income, support, and even principal distributions to children during their lifetimes while still preserving the bulk of the trust corpus for the next generation. This flexibility makes GSTs particularly attractive to high-net-worth New York families seeking to balance current support with long-term legacy goals.
Understanding the Generation Skipping Transfer Tax
The federal Generation Skipping Transfer Tax (GSTT) is imposed at a flat rate of 40% on transfers that skip a generation. It applies in addition to any gift or estate tax. Without proper planning, the combined effect of estate tax and GSTT can erode an inheritance dramatically before it reaches younger generations.
Fortunately, the Internal Revenue Code provides each individual with a GST exemption that can be allocated to transfers in trust. When the exemption is allocated correctly, trust assets, and all future appreciation on those assets, can pass to remote descendants free of GSTT for the duration of the trust. Strategic exemption allocation is one of the most valuable services a knowledgeable estate planning attorney provides.
How New York Law Affects Generation Skipping Trusts
New York has its own estate tax with an exemption amount that differs from the federal threshold, and New York's so-called "cliff" can result in the full estate being taxed if it exceeds 105% of the exemption. New York does not impose a separate generation skipping transfer tax, but the interplay between the federal GSTT and New York estate tax requires careful coordination.
New York also recently modernized its rule against perpetuities for trusts holding personal property, which affects how long a GST can endure. While New York does not permit truly perpetual "dynasty" trusts in the manner of some jurisdictions, properly structured trusts can last for many decades, sheltering assets from transfer tax across multiple generations. An experienced New York attorney can advise whether the trust should be governed by New York law or whether circumstances warrant a different situs.
Key Benefits of a Generation Skipping Trust
- Transfer tax savings: Properly funded GSTs can shield millions of dollars from estate and GST tax across multiple generations.
- Asset protection: Because the trust is irrevocable and beneficiaries do not own the assets outright, trust property is generally protected from beneficiaries' creditors, divorcing spouses, and lawsuits.
- Controlled distributions: The settlor can dictate how and when beneficiaries receive distributions, encouraging responsible stewardship.
- Professional management: A corporate or professional trustee can manage investments, file tax returns, and administer distributions with fiduciary experience.
- Legacy preservation: Wealth remains within the family bloodline rather than being diluted by transfer taxes or external claims.
Who Should Consider a GST in New York?
Generation skipping trusts are not appropriate for every family. They are most beneficial for individuals and couples whose estates exceed the New York and federal estate tax exemptions, or who anticipate that their estates will grow to that level. Common candidates include:
- Business owners planning succession of a closely held company
- Real estate investors with substantial New York and out-of-state holdings
- Executives and professionals with concentrated equity positions
- Families who have already used or partially used their lifetime gift tax exemptions
- Grandparents who wish to fund education, housing, or business opportunities for younger generations
Funding a Generation Skipping Trust
The assets used to fund a GST must be selected carefully. Appreciating assets are particularly attractive because all post-transfer growth occurs outside the taxable estate. Common funding strategies include:
- Lifetime gifts using annual exclusion amounts and remaining lifetime exemption
- Sales of assets to the trust in exchange for a promissory note
- Contributions of life insurance policies, often through an irrevocable life insurance trust coordinated with GST planning
- Transfers of interests in closely held businesses or family limited partnerships, often with valuation discounts
- Testamentary funding through a will or revocable trust
Each funding method has distinct tax consequences, valuation requirements, and reporting obligations. Gift tax returns must be filed timely, and GST exemption must be affirmatively allocated in many cases to avoid unintended results.
Trustee Selection and Administration
Choosing the right trustee is critical to the long-term success of a generation skipping trust. The trustee will manage investments, exercise discretion over distributions, and serve as the steward of family wealth for decades. Many New York families select a corporate trustee, a trusted family member, an attorney, or a combination through a co-trustee arrangement. New York's directed trust and trust protector statutes provide additional flexibility, allowing families to divide investment, distribution, and administrative responsibilities among different parties.
Common Pitfalls to Avoid
Generation skipping trusts are technically demanding, and errors can be costly or impossible to correct. Common mistakes include failing to properly allocate GST exemption on a timely filed Form 709, using boilerplate trust language that does not address New York's tax cliff, neglecting to coordinate the GST with life insurance and retirement accounts, and selecting a trustee without succession planning. An attorney who concentrates on sophisticated estate planning will anticipate and avoid these issues.
How Our New York Attorneys Can Help
Our firm guides New York families through every stage of generation skipping trust planning. We begin with a comprehensive review of your assets, family structure, and legacy goals. We then design a customized trust instrument, coordinate funding strategies with your financial advisors and accountants, prepare and file required gift tax returns, and provide ongoing counsel on trust administration. When circumstances change—through new tax legislation, family events, or shifting financial goals—we work with trustees and beneficiaries to modify or decant trusts where appropriate under New York law.
