As its name implies, a generation-skipping trust is one that you establish for the ultimate benefit of your grandchildren, thereby bypassing your children. This may prove an advantageous strategy for you if one of your children has demonstrated that (s)he does not handle money wisely.

Investor Guide points out that while your trust’s main purpose is to keep assets out of the hands of a spendthrift child, that does not necessarily mean that you disinherit him or her entirely. For instance, you can structure the trust so that your child receives the income it produces throughout his or her life. When (s)he dies, the assets go to his or her children, i.e., your grandchildren.

Additional trust benefits

In addition to keeping assets out of the hands of your financially irresponsible child, your generation-skipping trust can provide you – and him or her – with other benefits as well, including the following:

  • In the event (s)he divorces, none of the trust’s assets can become the property of his or her former spouse as part of any settlement agreement.
  • In the event (s)he accumulates debts (s)he cannot pay, none of the trust’s assets can go to creditors as a means of debt payment.
  • As you place assets into the trust during your lifetime, you can claim the $5.49 million gift tax exemption, which expands to $11.2 million if you and your spouse jointly establish the trust.
  • When you die, your estate can claim the $5.49 million federal estate tax exemption, which expands to $11.2 million if you and your spouse jointly establish the trust.

All in all, a generation-skipping trust may solve the financially irresponsible child problem you have been worrying about.