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Generation-skipping trust may be your grandchild's best gift

Those of you with grandchildren, whether they're toddlers or already adults, know how fun and rewarding it is to give them gifts. But as they grow older, it can become harder to know exactly what the best gifts are for a grandchild. You may even be wondering what gifts you can leave behind that will have a lasting impact -- something your grandchildren will cherish and remember you by after you're gone.

Beyond personal heirlooms is the question of whether and how to leave monetary assets to your grandchildren. One clear option is through a will, but depending on your intentions, a will may open the inheritance to certain risks, such as estate taxes and, in some unfortunate cases, parents of grandchildren who might spend the money first.

One option to consider is a generation-skipping trust, also known as a dynasty trust. This type of trust allows you to transfer large amounts of money to an heir two generations down, and do so tax-free. You can arrange for your grandchildren to use the money for a specific beneficial purpose (education, for example) so it isn't squandered.

There are some good reasons for taking this route. Let's say, for example, that your child has divorced and remarried after having a child. If you're concerned that your grandchild's stepparent won't ensure that your granddaughter gets the college funds you saved for her, a GST may be a wise move. It will prevent your child and their spouse from accessing the funds, which then become marital property.

Even without concerns like this, a GST will enable you to gift money to your grandchildren without the estate tax burden that a will might carry with it. A GST can be set up for your children to draw from the earnings and your grandchildren to inherit the balance.

If you aren't sure if you need a GST or just want to learn more about the best trust options for you and your family, an estate planning lawyer is an ideal resource to help you determine what will work best for you. Seeking an attorney who practices in your area is essential, since laws can vary considerably from state to state.

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