A generation-skipping trust is an estate-planning device for those who wish to pass wealth on to future generations without incurring estate or gift taxes. This type of trust allows a person's assets to progress through generations without passing through the intermediate generation of children. Not only does this save the grantor and their children from the estate taxes, it also protects the assets from the children's creditors, divorces, and other financial pitfalls that can come with passing assets without the extra layer of protection.

Most generation-skipping trusts are set up with the financial provider accepting the trust assets and making payments to the grandchildren, who are legally and financially separate from their parents. Other trusts, called inherent trusts, function similarly but with one key difference: The original grantor continues to manage the trust, effectively making them the designated trustee.

The assets are placed in the trust and then invested by a professional at the direction of the grantor. Tax deductions are often available on the investment growth, and trust assets can be drawn on at any time. Beneficiaries to the trust are often the grandchildren. The instructions provided by the grantor are followed to the letter, so the assets are effectively sheltered from the grandchildren’s creditors, divorces, and other debts.

Generation-skipping trusts generally have a variety of advantages. They provide protection from creditors and ensure that assets are managed efficiently. These trusts are also an effective way to pass assets down to heirs without having to pay estate taxes.

In most cases, generation-skipping trusts are a powerful way to ensure that assets are passed down to future generations without burdening them with estate taxes or expose them to financial pitfalls. Therefore, these trusts can provide a great source of financial stability for future generations.