One of the main goals of your estate plan likely is to pass wealth to your children and grandchildren in the most efficient and tax-advantageous ways. Often you can do this by establishing trusts for your children. They later establish trusts for their children, and so on and so forth. But what if one of your children has proved to be financially irresponsible? What if you do not trust him or her to handle his or her inheritance wisely?

Investor Guide suggests that a generation-skipping trust may be the answer to your problem. You name your irresponsible child’s children; i.e., your grandchildren, as beneficiaries of this trust rather than your child himself or herself. This does not mean that you disinherit him or her, however. You can structure the trust so that your child receives the trust’s income during his or her lifetime before your grandchildren ultimately receive the trust’s assets.

Tax advantages

A generation-skipping trust can save you both gift and estate taxes. As you may know, you have a $5.49 million lifetime gift tax exemption. If you and your spouse jointly establish the trust, that gives you a $11.2 million combined exemption while you gift your grandchildren prior to their ultimate inheritance.

You likewise have a $5.49 million federal estate tax exemption that increases to $11.2 million for a married couple. If the trust assets total less than that when you die, you can pass the entire trust amount your grandchildren tax-free.

Nontax advantages

Your generation-skipping trust not only protects against irresponsible spending by your adult child, but also assures that should (s)he divorce, his or her spouse cannot invade the trust assets or income. The same applies to your child’s creditors if and when (s)he experiences a failed business, exorbitant medical bills or any other type of financial debt.