Generation-Skipping Trust in Florida

What Is a Generation-Skipping Trust?

A generation-skipping trust is an irrevocable trust designed to transfer wealth to beneficiaries who are two or more generations below the grantor, such as grandchildren or great-grandchildren, while minimizing or eliminating the generation-skipping transfer (GST) tax. Without proper planning, transfers that skip a generation can be subject to the GST tax in addition to estate and gift taxes, resulting in an effective combined tax rate that can consume more than half of the transferred wealth. Under the Florida Trust Code, Chapter 736 of the Florida Statutes, generation-skipping trusts created in or administered from Florida benefit from the state's favorable trust laws, including the absence of a state income tax on trust income for non-resident beneficiaries.

At the Law Offices of Albert Goodwin, PA, we help high-net-worth families throughout South Florida establish generation-skipping trusts that leverage the GST tax exemption to pass wealth efficiently across multiple generations. Our office designs trust structures that comply with both the Internal Revenue Code's transfer tax provisions and the Florida Trust Code.

Understanding the Generation-Skipping Transfer Tax

The generation-skipping transfer tax was enacted by Congress to prevent wealthy families from avoiding estate tax at each generational level by transferring assets directly to grandchildren or more remote descendants. Without the GST tax, a family could skip one or more generations of estate tax by leaving assets directly to grandchildren instead of children, thereby avoiding the estate tax that would have been imposed had the assets passed through the children's estates.

The GST tax is imposed at a flat rate equal to the highest federal estate tax rate, currently 40%, on three types of generation-skipping transfers defined in 26 U.S.C. §§ 2611-2613:

• Direct skips. A transfer directly to a skip person, either outright or in trust. A skip person is a beneficiary who is two or more generations below the transferor, such as a grandchild. Direct skips are taxed at the time of transfer.
• Taxable terminations. The termination of an interest in a trust where, after the termination, all remaining interests are held by skip persons. For example, when a child who is the income beneficiary of a trust dies and the trust assets pass to the grandchildren, this is a taxable termination.
• Taxable distributions. A distribution from a trust to a skip person that is not a direct skip or taxable termination. For example, a discretionary distribution from a trust to a grandchild while the child is still a beneficiary of the trust.

The GST Tax Exemption

Each individual has a lifetime GST tax exemption that can be allocated to generation-skipping transfers to shield them from the GST tax. Under the Tax Cuts and Jobs Act of 2017 (TCJA), the GST tax exemption was doubled and is currently $13.61 million per individual (as of 2024), indexed for inflation. A married couple can collectively shelter up to $27.22 million from the GST tax.

Unlike the estate tax exemption, the GST tax exemption is not portable between spouses. This is a critical distinction. If the first spouse dies without using their GST tax exemption, that exemption is lost forever. It cannot be transferred to the surviving spouse through a portability election. This is one of the primary reasons that credit shelter trust planning remains essential for married couples, even after the introduction of estate tax portability. A credit shelter trust funded at the first death can be allocated the deceased spouse's GST tax exemption, ensuring that exemption is not wasted.

The TCJA's doubled exemption is scheduled to sunset on December 31, 2025, at which point the GST tax exemption will revert to approximately $5 million, adjusted for inflation. Families with significant wealth should take advantage of the current high exemption by establishing and funding generation-skipping trusts before the sunset occurs.

Allocating the GST Tax Exemption

Proper allocation of the GST tax exemption is essential to the effectiveness of a generation-skipping trust. The grantor or the grantor's executor allocates the exemption to specific transfers or trusts by filing IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). The allocation is expressed as an "inclusion ratio," which determines how much of each future distribution or termination is subject to the GST tax. A trust with an inclusion ratio of zero is entirely exempt from the GST tax, regardless of how much the trust grows over time.

Failure to properly allocate the GST tax exemption can have devastating tax consequences. If the exemption is not allocated to a generation-skipping trust, every distribution to a skip person and every taxable termination will be subject to the 40% GST tax. At the Law Offices of Albert Goodwin, PA, we ensure that all GST tax exemption allocations are properly made and documented to protect our clients' multigenerational wealth transfer plans.

Structure of a Generation-Skipping Trust

A generation-skipping trust is typically established as an irrevocable trust, either during the grantor's lifetime or at death through testamentary provisions in a will or revocable trust. The trust is designed to benefit multiple generations of descendants without the trust assets being included in any descendant's taxable estate. The key structural features include:

• Discretionary distributions. The trustee is given broad discretion to make distributions for the health, education, maintenance, and support of the beneficiaries. By keeping distributions discretionary rather than mandatory, the trust assets remain in trust and are not included in any beneficiary's estate.
• Spendthrift provisions. A spendthrift clause, valid and enforceable under F.S. § 736.0502, prevents beneficiaries from assigning their trust interests and protects those interests from the beneficiaries' creditors. This is especially important for a trust intended to last for multiple generations, as it provides ongoing creditor protection for each generation of beneficiaries.
• Trust protector provisions. Many generation-skipping trusts include a trust protector who has the power to modify certain administrative provisions, change the trust's situs, or remove and replace the trustee. A trust protector provides flexibility to adapt the trust to changes in law or family circumstances over the trust's extended duration.
• No general power of appointment. To keep trust assets out of the beneficiaries' taxable estates, the trust does not give any beneficiary a general power of appointment over trust assets. A general power of appointment would cause the trust assets to be included in the power holder's estate under 26 U.S.C. § 2041. Instead, beneficiaries may be given limited powers of appointment that allow them to direct the disposition of trust assets among a defined class of permissible appointees, typically their descendants.

Florida's Favorable Trust Laws for Generation-Skipping Trusts

No Rule Against Perpetuities for Trusts

One of the most significant advantages of establishing a generation-skipping trust in Florida is the state's abolition of the rule against perpetuities for interests in trust. Under F.S. § 689.225(2)(f), the common-law rule against perpetuities does not apply to interests in a trust created after December 31, 2000. This means that a trust created in Florida after that date can continue indefinitely, benefiting generation after generation without ever being required to terminate. This makes Florida one of the most attractive jurisdictions in the nation for dynasty trust planning.

The ability to maintain a trust in perpetuity is particularly powerful when combined with the GST tax exemption. Once the grantor allocates their GST tax exemption to the trust and achieves an inclusion ratio of zero, the trust assets and all future growth are permanently exempt from the GST tax, the estate tax, and the gift tax for every future generation. The trust can continue to grow and compound wealth across an unlimited number of generations, free of transfer tax at every level.

No State Income Tax on Trust Income

Florida does not impose a state income tax on individuals or trusts. This is a significant advantage for generation-skipping trusts administered in Florida, as trust income is not eroded by state income tax. In contrast, trusts administered in states like California, New York, or New Jersey may be subject to state income tax rates exceeding 10%, substantially reducing the trust's long-term growth. For families in other states with existing generation-skipping trusts, changing the trust's situs to Florida can produce meaningful tax savings over the life of the trust.

Trust Decanting

Florida's trust decanting statute, F.S. § 736.04117, allows a trustee with discretionary distribution authority to distribute trust assets from an existing trust into a new trust with different terms. This is a valuable tool for generation-skipping trusts because it allows the trustee to modify the trust's administrative provisions, extend the trust's duration, or adjust distribution standards to respond to changes in law or family circumstances, all without court involvement and without triggering adverse GST tax consequences if the decanting is properly structured.

Generation-Skipping Trust Planning Strategies

Leveraging the Current High Exemption

With the TCJA sunset approaching, one of the most important planning strategies is to establish and fund a generation-skipping trust now, while the $13.61 million GST tax exemption is available. By transferring assets to an irrevocable generation-skipping trust and allocating the GST tax exemption before the exemption decreases, the grantor locks in the full benefit of the current exemption. The IRS has confirmed in final regulations (Treasury Regulation § 20.2010-1(c)) that transfers made using the increased exemption before the sunset will not be clawed back if the exemption decreases in the future.

Using the GST Exemption with Life Insurance

An irrevocable life insurance trust (ILIT) that is designed as a generation-skipping trust can be an exceptionally efficient wealth transfer vehicle. The grantor makes annual gifts to the trust to pay life insurance premiums, and the GST tax exemption is allocated to each gift. Upon the grantor's death, the life insurance death benefit is received by the trust free of income tax, estate tax, and GST tax. The trust can then hold and invest the proceeds for the benefit of grandchildren, great-grandchildren, and more remote descendants indefinitely under Florida law.

Combining GST Planning with Credit Shelter Trusts

For married couples, the most effective approach is to combine credit shelter trust planning with GST tax exemption allocation. When the first spouse dies, the credit shelter trust is funded with assets equal to the deceased spouse's estate tax exemption, and the deceased spouse's GST tax exemption is allocated to that trust. Because the GST tax exemption is not portable, this is the only way to preserve both spouses' GST tax exemptions. The credit shelter trust can then benefit the surviving spouse during their lifetime and pass the remaining assets to grandchildren and more remote descendants free of all transfer taxes.

Contact a Miami Generation-Skipping Trust Attorney

Generation-skipping trust planning is one of the most powerful strategies available for preserving family wealth across multiple generations, but it requires precise drafting, careful GST tax exemption allocation, and a thorough understanding of both federal transfer tax law and the Florida Trust Code. Whether you are establishing a new generation-skipping trust, reviewing an existing trust in light of the TCJA sunset, or considering moving an out-of-state trust to Florida to take advantage of the state's favorable laws, the Law Offices of Albert Goodwin, PA can guide you through the process.

We represent individuals and families throughout Miami-Dade County, Broward County, and Palm Beach County in all aspects of multigenerational estate tax planning and trust administration. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134. To schedule a consultation, call us at 786-522-1411 or email [email protected].