For Australian families looking to secure their legacy and provide for their grandchildren, generation-skipping trusts (GSTs) are becoming an increasingly popular tool in estate planning circles. As we move through 2025, new tax policies and intergenerational wealth trends are shining a spotlight on these vehicles. But what exactly is a generation-skipping trust, and how can it fit into an Australian financial strategy?
What Is a Generation-Skipping Trust?
Traditionally associated with US estate planning, a generation-skipping trust is a legal arrangement that allows assets to be transferred directly to beneficiaries at least two generations below the grantor—commonly grandchildren—bypassing the children. While Australia doesn’t have a direct equivalent to the US GST, local trust structures can achieve similar outcomes, especially with the evolving landscape of family trusts and testamentary trusts.
Key features of a GST-like approach in Australia include:
- Intergenerational Wealth Transfer: The trust can be set up to benefit grandchildren or even great-grandchildren, with specific rules on distributions.
- Asset Protection: Assets in trust are often shielded from creditors, family law claims, or spendthrift beneficiaries.
- Potential Tax Efficiencies: Testamentary trusts can distribute income to minors at adult tax rates under certain conditions, potentially reducing family tax liabilities.
2025 Policy Updates and Tax Considerations
Australian tax law does not impose a specific ‘generation-skipping transfer tax’ like the US, but family trusts and testamentary trusts are subject to their own regulatory and tax frameworks. In 2025, several policy developments are impacting how families use trusts for intergenerational transfers:
- ATO Focus on Trust Distributions: The Australian Taxation Office continues to tighten its scrutiny of family trust distributions, especially those targeting lower-taxed family members. The 2022 PCG 2022/2 guidelines remain in force for 2025, meaning careful record-keeping and genuine entitlement are essential.
- Testamentary Trusts Remain Attractive: Testamentary trusts created via a will allow income splitting among minors at adult tax rates. This remains a key tool for families wanting to provide for grandchildren, particularly as property and share portfolios continue to grow in value.
- Superannuation and Estate Planning: The 2025 superannuation transfer balance cap increase ($1.98 million) means more families are considering using excess super benefits in testamentary trusts, especially where grandchildren are named as beneficiaries.
While there is no additional tax for skipping a generation, capital gains tax (CGT) and stamp duty may still apply when assets are transferred to the trust or distributed to beneficiaries. Legal and tax advice is crucial to structuring these arrangements efficiently.
Real-World Examples: How Australians Are Using Generation-Skipping Trusts
Consider the case of the Nguyen family in Sydney. After a successful business exit in 2023, the family wanted to ensure their wealth would benefit not just their children, but also their grandchildren—while protecting against family disputes and ensuring tax effectiveness. By establishing a testamentary trust in their wills, they directed a portion of their estate to be held and managed for the grandchildren’s education and first home purchases. This approach allowed income to be distributed tax-effectively and safeguarded assets against future relationship breakdowns.
Another example: The Patel family in Melbourne used a discretionary family trust structure to provide for their grandchildren’s future needs, with clear instructions to trustees about staged distributions at key life milestones (university, starting a business, etc.). While the trust didn’t strictly skip a generation, it enabled flexible, controlled support across multiple generations.
These examples highlight how modern Australian families are adapting traditional trust structures to achieve the goals of generation-skipping trusts—even in the absence of a formal GST framework.
Is a Generation-Skipping Trust Right for You?
With the ongoing transfer of wealth—estimated at $3.5 trillion over the next 20 years in Australia—families are increasingly looking for ways to balance tax, asset protection, and family harmony. A generation-skipping trust or similar arrangement can be a powerful solution if you:
- Want to ensure grandchildren or younger generations benefit directly from your estate
- Wish to protect assets from creditors, spendthrift risks, or relationship breakdowns
- Are seeking to optimise tax outcomes for your family group
- Value long-term legacy and structured giving
Given the complexity of trust law and tax, setting up such a structure requires careful planning and expert advice. But for many families, the benefits can be generational—quite literally.
