Generation-skipping trust

A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior - typically your grandchildren.

The generation-skipping exemption has been increasing gradually and is $3.5 million in 2009. You may specify that your children may receive income from the trust and even use its principal for almost anything that would benefit your grand kids, including health care, housing or tuition bills.

Beware, however. If you leave more than the exemption amount, the bequest will be subject to a generation-skipping transfer tax. This tax is separate from estate taxes, and is designed to stop wealthy seniors from funneling all their money to their grandchildren.