The phrase “generation-skipping” makes people picture a grandparent cutting out the children and leaving everything to the grandchildren. That is not what sophisticated families do at all. Their children are often the primary beneficiaries of these trusts, living comfortably from them for life. What gets skipped is not a generation of people — it is a generation of estate tax.
Understanding that distinction is the key to one of the most powerful ideas in wealth planning, and to why Congress created an entire separate tax just to police it.
Key takeaways
- For estates above the exemptions, wealth is taxed at every generational handoff — once when parents die, again when children die, again at the grandchildren’s deaths.
- Generation-skipping planning parks wealth in long-term trusts so it benefits each generation without being legally owned by any of them — so no estate tax at each death.
- The GST tax is Congress’s countermeasure, but everyone gets a large GST exemption; properly allocating it to a trust can make everything inside exempt for the trust’s entire life.
- Children do not lose out: they can be lifetime beneficiaries, and even trustees, of a trust they will never be taxed on owning.
The tax toll booth at every generation
Picture family wealth as traffic on a highway with a toll booth at every generational exit. Parents die: estate tax. What is left passes to the children, who invest and grow it, and then die: estate tax again on the same underlying wealth. Then the grandchildren’s estates pay a third time. Compounded over a century, this repeated tolling is one of the main reasons ordinary fortunes evaporate. The dynastic solution is structural: instead of leaving wealth to your children outright — which places it in their estates — you leave it in a trust for your children. They can receive distributions, live in trust-owned property, and in many designs help direct the money. But because they never legally own it, their deaths trigger nothing. The wealth glides past the toll booth, generation after generation.
Why the GST tax exists — and why it usually doesn’t bite
Congress noticed this glide path decades ago and responded with the generation-skipping transfer tax: a separate, steep tax on wealth that passes to “skip persons” — grandchildren, later descendants, and trusts for their benefit — without being taxed in the middle generation’s estate. It sounds like it should kill the strategy. In practice it rarely does, because every individual has a GST exemption comparable in size to the federal estate tax exemption. The planning is all about allocation: when you fund a trust and properly allocate GST exemption to it, the trust’s “inclusion ratio” becomes zero — meaning everything in it, including decades of future growth, is exempt from GST tax for as long as the trust lasts. Allocate exemption to a trust that then triples in value, and you have effectively tripled your exemption. This is precisely how dynasty trusts are armored, and why exemption allocation on gift tax returns is some of the highest-stakes paperwork in tax planning.
Skip persons, non-skip persons, and getting the design right
The vocabulary is simpler than it sounds. Your children are “non-skip” persons; grandchildren and beyond are “skip” persons. A trust that can benefit both is watched by the GST rules at key moments — when property leaves the trust to a skip person, or when the last non-skip beneficiary’s interest ends. Poorly drafted trusts stumble into taxable events; well-drafted ones, with exemption fully allocated, sail through all of them. Design choices matter enormously: whether children serve as trustees, what standards govern distributions, whether each child’s share splits into separate descending trusts. New York adds its own wrinkle — the state’s rule against perpetuities limits how long trusts can run here, which is why counsel weighs trust duration and situs carefully as part of a complete estate plan.
The power move: layering with life insurance
The elite version stacks strategies. A family funds an irrevocable trust with gifts, allocates GST exemption to make it fully exempt, and then has the trust buy life insurance on the parents. Modest exempt dollars pay premiums; at death, the trust collects a large death benefit that is both estate-tax-free and GST-exempt — a multiplication of the exemption’s reach that can fund three generations from one policy. A scaled-down New York version might be a grandparent whose trust holds a policy alongside a brokerage account, quietly building an educational and safety-net fund for grandchildren designed to stay outside their estates and beyond the reach of most creditors and divorce claims.
How Schwartsman Law Group can help
Schwartsman Law Group builds generation-skipping trusts for New York families, designed within New York's rule against perpetuities or under another state's law where appropriate — drafting the trusts, coordinating GST exemption allocation with your accountant, and layering in life insurance where it multiplies the result. Founding attorney Marianna Schwartsman and her team advise clients from offices in Brooklyn, Manhattan, and Manhasset, and serve families in English, Spanish, and Russian. This guide is general information, not legal advice — the right structure depends on your assets, your family, and your goals. Call +1 212 518 3868, email ms@schwartsmanlaw.com, or request a free consultation to have it designed and set up properly.