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How to Design a Generation-Skipping Trust to Minimize Estate Taxes for Grandchildren

Designing a generation-skipping trust (GST) to minimize estate taxes for grandchildren in Kansas requires a strategic approach that balances federal and state tax laws, family dynamics, and long-term financial goals.

A GST allows wealth to pass directly to grandchildren (or more remote descendants) while potentially avoiding estate taxes at the intervening generation (the grantor’s children).

This guide provides a comprehensive overview of how to structure a GST effectively, with a focus on Kansas-specific considerations, estate tax minimization, and practical steps for implementation. The following sections outline the key components, legal structure, and best practices for creating a GST tailored to these objectives.

Our estate planning attorney in Overland Park, Kansas, can help you through this process.

The Generation-Skipping Trust and Its Purpose

A generation-skipping trust is an estate planning tool designed to transfer wealth to beneficiaries who are at least two generations removed from the grantor, such as grandchildren. The primary purpose of a GST is to bypass the estate tax that would otherwise apply when assets pass through the grantor’s children’s estates.

By placing assets in a trust for the benefit of grandchildren, the grantor can leverage tax exemptions and reduce the overall tax burden on the family’s wealth.

The federal government imposes a generation-skipping transfer (GST) tax on transfers to “skip persons” (individuals two or more generations below the grantor). In 2025, the federal GST tax rate is 40%, but each individual has a GST tax exemption of $13.61 million (adjusted annually for inflation).

Properly structured, a GST can utilize this exemption to shield assets from both estate and GST taxes, preserving wealth for future generations.

In Kansas, there is no state-level estate or inheritance tax as of 2025, which simplifies planning compared to states with such taxes. However, federal estate and GST tax rules still apply, making the GST an attractive option for Kansas residents with significant wealth who wish to benefit their grandchildren.

Key Benefits of a Generation-Skipping Trust

Tax minimization: A GST allows assets to bypass the estate of the grantor’s children, avoiding estate taxes at that level. With proper planning, the trust can also leverage the GST tax exemption to minimize or eliminate GST tax liability.
Wealth preservation: By placing assets in a trust, the grantor can protect them from creditors, divorce settlements, or mismanagement by beneficiaries.
Control and flexibility: The grantor can dictate the terms of the trust, including how and when distributions are made, ensuring that grandchildren use the funds responsibly.
Long-term legacy: A GST can provide for multiple generations, supporting grandchildren and potentially great-grandchildren, depending on the trust’s structure.

A Generation-Skipping Trust offers significant benefits, including tax minimization, wealth preservation, flexible control, and the ability to create a lasting legacy for multiple generations. Our estate planning attorney at Heartland Estate Law in Overland Park, Kansas, can help you through this process.

Step-by-Step Guide to Designing a Generation-Skipping Trust

1. Assess Your Financial Situation and Goals

Before creating a GST, evaluate your estate’s size, composition, and liquidity. In 2025, the federal estate tax exemption is $13.61 million per individual ($27.22 million for a married couple). If your estate exceeds this threshold, a GST can help reduce taxable wealth. Consider the following:

Asset types: Identify assets to fund the trust, such as cash, real estate, stocks, or business interests. Liquid assets are often easier to manage within a trust.
Family dynamics: Determine whether your children need financial support or if they are financially independent. A GST assumes the children’s estates will not rely on the trust assets.
Grandchildren’s needs: Consider the number of grandchildren, their ages, and their future financial needs (e.g., education, home purchases, or business ventures).

In Kansas, where there is no state estate tax, the focus is on federal tax minimization. Work with a financial advisor to project your estate’s growth and estimate potential tax liabilities.

2. Understand Federal GST Tax Rules

The GST tax applies to transfers to skip persons, but the $13.61 million exemption can be allocated to shield trust assets. Key considerations include:

Direct vs. indirect skips: A direct skip occurs when assets pass outright to a grandchild. An indirect skip occurs when assets are held in trust for a child’s lifetime, with the remainder passing to grandchildren. A GST is typically structured as an indirect skip to maximize control and tax benefits.
Allocation of exemption: The GST exemption must be allocated on a federal gift or estate tax return (Form 709 or Form 706). Automatic allocation applies in some cases, but manual allocation may be necessary for intricate trusts.
Inclusion ratio: Trusts are assigned an inclusion ratio between 0 and 1. A trust fully covered by the GST exemption has an inclusion ratio of 0, meaning no GST tax applies to distributions. Proper allocation is critical to achieving this.

Consult a tax professional to make sure the exemption is allocated correctly, as errors can result in significant tax liabilities.

3. Choose the Trust Structure

A GST can be created during the grantor’s lifetime (inter vivos trust) or at death (testamentary trust). Key structural decisions include:

Irrevocable trust: Most GSTs are irrevocable to remove assets from the grantor’s taxable estate. Once funded, the grantor relinquishes control, but the trust terms govern asset management and distribution.
Dynasty trust: In Kansas, the rule against perpetuities allows trusts to last for up to 125 years. A dynasty trust can extend the GST’s benefits to great-grandchildren or beyond, maximizing tax savings.
Discretionary vs. mandatory distributions: The trust can grant the trustee discretion to distribute income or principal based on grandchildren’s needs or require mandatory distributions at specific ages or events (e.g., college graduation).

Selecting the appropriate structure for a Generation-Skipping Trust, such as an irrevocable inter vivos or testamentary trust, a long-lasting dynasty trust, or one with discretionary or mandatory distributions, allows the grantor to tailor the trust to their estate planning and legacy goals while optimizing tax benefits.

4. Select a Trustee

The trustee manages the trust assets and confirms compliance with its terms. Choose a trustee with financial acumen and impartiality, such as:

Professional trustee: A bank or trust company with experience in trust administration, especially for large or intricate trusts.
Family member: A trusted relative may serve as trustee, but potential conflicts of interest must be managed.
Co-Trustees: Combining a family member with a professional trustee can balance personal wisdom with experience.

In Kansas, trustees are subject to fiduciary duties under the Kansas Uniform Trust Code, requiring them to act in the beneficiaries’ best interests. Confirm the trustee understands the GST’s tax implications and reporting requirements.

5. Draft the Trust Document

Work with an experienced estate planning attorney to draft the trust document. Key provisions include:

Beneficiaries: Clearly identify the grandchildren as primary beneficiaries, with contingent beneficiaries (e.g., great-grandchildren) if applicable.
Distribution terms: Specify how and when distributions will be made, such as for education, health, or maintenance. Include spendthrift provisions to protect assets from creditors.
GST exemption allocation: Instruct the trustee or executor to allocate the GST exemption to the trust.
Trustee powers: Grant the trustee authority to invest, sell, or distribute assets, subject to fiduciary standards.
Termination clause: Define when the trust will terminate, such as when the youngest grandchild reaches a certain age or after a set number of years.

Drafting a Generation-Skipping Trust document with the guidance of an experienced estate planning attorney verifies clear provisions for beneficiaries, distribution terms, GST exemption allocation, trustee powers, and trust termination, effectively safeguarding assets and fulfilling the grantor’s long-term legacy objectives.

6. Fund the Trust

Transfer assets to the trust to activate it. Common funding strategies include:

Cash or securities: These are straightforward to transfer and manage.
Real estate: Confirm proper titling and consider appraisals to establish value for tax purposes.
Life insurance: A GST can own a life insurance policy, with proceeds passing tax-free to grandchildren.
Business interests: Transferring closely held business interests requires valuation and may involve discounts for lack of marketability.

Funding during the grantor’s lifetime can also utilize the annual gift tax exclusion ($18,000 per recipient in 2025) or the lifetime gift tax exemption ($13.61 million). Coordinate with a tax advisor to minimize gift tax implications.

7. Address Kansas-Specific Considerations

While Kansas lacks a state estate tax, other state-specific factors may influence the GST:

Kansas uniform trust code: This governs trust administration, including trustee duties, beneficiary rights, and trust modifications. Verify that the trust complies with these rules.
Probate avoidance: Assets in an irrevocable GST avoid probate, which is advantageous in Kansas, where probate can be time-consuming and costly.
Local advisors: Work with a Kansas-based estate planning attorney and financial advisors familiar with state law and local court practices.

Establishing a Generation-Skipping Trust in Kansas requires compliance with the Kansas Uniform Trust Code, leverages probate avoidance benefits, and benefits from collaboration with local advisors to make sure of alignment with state-specific legal and financial considerations.

8. Plan for the Grantor’s Children

Since a GST bypasses the grantor’s children, consider their financial needs separately. Options include:

Separate trusts: Create trusts for children that provide income or principal without triggering estate taxes.
Outright gifts: Use the annual gift tax exclusion to transfer assets to children during your lifetime.
Life insurance: Purchase life insurance to provide liquidity for children, with proceeds passing outside the taxable estate.

Balancing the needs of children and grandchildren requires careful planning to maintain family harmony.

9. Monitor and Update the Trust

A GST is a long-term commitment, but circumstances may change. Periodically review the trust to:

Adjust for tax law changes: Federal estate and GST tax laws may evolve, requiring updates to the trust structure.
Account for family changes: Births, deaths, or changes in grandchildren’s financial situations may necessitate amendments.
Evaluate trustee performance: Confirm the trustee is managing assets effectively and complying with fiduciary duties.

While an irrevocable trust is difficult to modify, certain provisions (e.g., a trust protector or decanting powers) can provide flexibility.

10. Educate Beneficiaries

Inform grandchildren about the trust’s purpose and terms to prepare them for their future roles as beneficiaries. This can include:

Financial education: Teach grandchildren about money management to make sure they use distributions wisely.
Trust expectations: Explain when and how distributions will occur to set realistic expectations.
Family legacy: Share the grantor’s values and goals to foster a sense of responsibility.

Educating grandchildren about the Generation-Skipping Trust’s purpose, terms, and financial management fosters responsible stewardship, aligns expectations, and preserves the grantor’s family legacy.

Contact an Estate Planning Attorney Today

Designing a generation-skipping trust to minimize estate taxes for grandchildren in Kansas is a powerful estate planning strategy for high-net-worth individuals.

By leveraging the federal GST exemption, structuring the trust carefully, and addressing Kansas-specific legal requirements, grantors can preserve wealth, protect assets, and create a lasting legacy for their grandchildren.