This is an irrevocable arrangement that provides income only, not access to Trust principal, to the Grantor’s spouse and/or children. It terminates when all have reached a specified age or died, with Trust principal then distributed to grandchildren.
Under a “loophole” in prior law, by skipping over the children in the final distribution of principal, a Grantor could save gift and estate tax. Now, such transfers are taxed at the maximum federal gift and estate tax rate of 50%. But, there is a cumulative exemption of $1,060,000 (adjusted annually for inflation) per donor that can be used to avoid tax on generation skipping transfers (by Trust or gift) during the donor’s lifetime, or at death. Also note that any gift to a natural person that qualifies for the $12,000 annual exclusion from federal gift and estate tax automatically qualifies for an exemption from the generation skipping tax. Qualifying for the $12,000 annual exclusion for gifts into a Generation-Skipping Trust is problematic, however.