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Simple English definitions for legal terms
generation skipping
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A quick definition of generation skipping:
Generation skipping refers to when a grandparent gives a gift to their grandchild without giving anything to their own child (the grandchild's parent). This used to be a way to avoid paying taxes, but now there is a tax on these gifts. However, a grandparent can still give small gifts to their grandchild without having to pay taxes.
A more thorough explanation:
Definition: Generation skipping refers to gifts made by a grandparent to a grandchild, skipping the grandchild's parent. This is usually done through a trust to avoid or defer federal gift or estate taxes. However, it is now subject to a generation skipping tax, and if made directly without a trust, the gift is as taxable as any large gift. Despite this, a grandparent can still give or leave gifts under $10,000 a year to a grandchild without a gift tax.
Example: John wants to leave his estate to his grandchildren, but he wants to avoid paying estate taxes. He sets up a generation skipping trust, which allows him to leave his assets to his grandchildren without paying taxes. However, the trust is subject to a generation skipping tax, which means that John's grandchildren will have to pay taxes on the assets they inherit.
Explanation: This example illustrates how a grandparent can use a generation skipping trust to leave assets to their grandchildren without paying estate taxes. However, the trust is subject to a generation skipping tax, which means that the grandchildren will have to pay taxes on the assets they inherit.