Generation-skipping transfer tax: How it can affect your estate plan

The generation-skipping transfer tax (GST tax) is a federal tax that may apply when you transfer wealth to someone two or more generations younger than you, such as a grandchild. Separate from the estate tax, the generation-skipping transfer tax is designed to prevent families from avoiding transfer taxes by skipping a generation when passing assets.

For individuals and families focused on preserving wealth across generations, understanding how the GST tax, GST exemption and generation-skipping trusts work is an important part of estate planning. While the tax can be significant, strategic planning may help reduce its impact and support your long-term legacy goals.

What is the generation-skipping transfer tax?

The generation-skipping transfer (GST) tax is a federal tax on assets you give to heirs more than one generation younger than you, usually grandchildren or great-grandchildren. It applies in addition to the standard estate tax.

Transfers to your children fall under standard estate tax rules. Also, if you leave assets to a grandchild whose parent (your child) has died, the GST tax generally doesn’t apply. That grandchild may step into their parent’s place for GST purposes.

The goal is simple. Without this tax, families could skip a generation and avoid a layer of estate tax. The GST tax helps close that gap while still leaving room for thoughtful planning.

Who counts as a skip person?

A skip person is someone two or more generations below you. For many families, that means grandchildren and great-grandchildren.

The rules can also apply to non-relatives. If you make a gift to someone unrelated who’s more than 37.5 years younger than you, that person is generally treated as a skip person, too. Some trusts can also be treated as skip persons when all beneficiaries are skip persons.

Before you structure a gift or trust, start here. If the recipient is a skip person, the GST tax may come into play.

How does the GST exemption work?

The GST exemption lets you transfer up to $15 million per individual in 2026 to younger generations without triggering the GST tax. This exemption is separate from the estate tax, though the two are unified and indexed for inflation.

Any transfer above your available exemption may be subject to the tax. Trust distributions of income or principal to grandchildren are generally subject to GST rules as well.

In many cases, the IRS automatically applies your exemption to qualifying lifetime gifts unless you choose otherwise. How and when you allocate that exemption can shape whether future trust distributions may be taxable, so careful documentation matters.

What is the current GST tax rate?

The generation-skipping transfer tax rate is a flat 40% on transfers that exceed your available GST exemption.

It’s a single rate, not graduated, which means only the amount above the exemption is taxed.

Who pays the generation-skipping transfer tax?

Who pays depends on how the transfer is structured. Here are two common scenarios.

• Direct generation skip: You give assets directly to grandchildren or place them in a trust established solely for their benefit. In these cases, you (the grantor) or the estate generally pays any GST tax due at the time of transfer.
• Indirect generation skip using trusts: You place assets in a trust that pays income to your child for life. After your child dies, the remaining assets go to your grandchildren. The recipient may pay the tax when they receive the distribution, or the trust may pay it when it terminates.

Keep in mind that the tax generally applies only to assets above the lifetime exemption amount ($15 million per individual in 2026).

What transfers are exempt from the GST tax?

The GST tax doesn’t apply to certain qualified nontaxable gifts. These include, but aren’t limited to:

• Annual exclusion gifts of up to $19,000 per recipient in 2026.
• Contributions to 529 plans, which offer a tax-advantaged way to save for education. You can front-load up to five years of annual exclusion gifts into a 529 plan for a grandchild without triggering the GST tax.
• Payments for tuition or medical care made directly to a school, doctor or hospital.

These gifts are generally tax-free for GST purposes and may also qualify as nontaxable gifts under gift tax rules.

Who typically considers GST planning?

Generation‑skipping transfer tax planning is most often considered by individuals and families who:

• Want to support multigenerational wealth goals.
• Expect assets to grow significantly over time, where transfer taxes can add up across generations.
• Provide financial support for grandchildren, such as education funding or long-term trusts.
• Are approaching current estate and gift tax exemption limits and want to plan proactively.

What’s the difference between the GST tax and the estate tax?

These two taxes often work together, but they aren’t the same. The estate tax applies to assets passing from your estate at death. The GST tax applies specifically to transfers that skip a generation.

One planning difference matters. With the estate tax, any unused exemption of the first spouse to die can pass to the surviving spouse (called portability). The GST exemption doesn’t work this way. Any GST exemption unused at death is typically lost.

How can families plan ahead to reduce GST tax exposure?

You can apply your lifetime GST exemption to transfers made during your life or at death. Discuss these options with your tax and legal advisors to find the right fit for your estate plan.

• Fund a generation-skipping trust during your lifetime. Gift up to your exemption amount into a trust that ultimately distributes assets to your grandchildren. This can help move future appreciation outside your estate.
• Leave a lifetime trust at death. You can leave up to your exemption amount in a trust for your children. When they pass, that amount plus growth may pass to your grandchildren without additional GST or estate tax.
• Consider a dynasty trust. This irrevocable trust is designed to last across multiple generations, allowing assets to grow while helping reduce transfer taxes at each generational level.

Timing can matter, because once assets are transferred, future appreciation may happen outside your estate.

Examples of how the GST tax works

These simplified scenarios show how GST tax may apply.

Direct generation skip

A grandparent gifts $18 million to a trust for their grandchildren in 2026. If the grandparent allocates $15 million of their lifetime exemption to the trust, the remaining $3 million may be subject to the GST tax at the applicable rate. In this example, the grandparent is responsible for any GST tax due.

Generation‑skipping trust with distributions

A grandparent places assets into a trust that pays income to their child for life. After the child dies, the remaining assets pass to the grandchildren. If the trust is properly structured and enough exemption is allocated, future distributions may not trigger additional GST tax or estate tax. If the exemption isn’t fully allocated, the tax could apply either when distributions are made or when the trust terminates.

Annual exclusion gift to a grandchild

A grandparent gives $19,000 directly to a grandchild during the year. This gift falls within the 2026 annual gift tax exclusion. It’s generally not subject to gift or GST tax and it doesn’t use any of the grandparent’s lifetime exemption.

Because outcomes depend on individual circumstances, families often review these strategies with their tax and legal advisors as part of a broader estate planning discussion.

Frequently asked questions

What is a skip person for GST tax purposes?

A skip person is a recipient two or more generations below you, such as a grandchild or great-grandchild. It can also include an unrelated person more than 37.5 years younger than you, or a trust whose beneficiaries are all skip persons.

Does the GST tax apply if a parent dies before a grandparent?

Generally, no. If a grandchild’s parent (your child) has already passed away, the grandchild typically moves up a generation for GST purposes. Transfers to that grandchild usually fall under standard estate tax rules instead.

Are 529 plans subject to the generation-skipping transfer tax?

Contributions to 529 plans for grandchildren can qualify for the annual gift tax exclusion and are generally not subject to the GST tax. You can also front-load five years of exclusion gifts into a 529 plan at once.

What is the difference between a generation skipping trust and a dynasty trust?

A generation skipping trust generally passes assets to grandchildren. A dynasty trust is designed to last for multiple generations, supporting great-grandchildren and beyond without incurring transfer taxes at each level.

Is the GST exemption portable between spouses?

No. Unlike the estate tax exemption, the GST exemption isn’t portable. Any GST exemption unused at your death is typically lost.

Plan ahead to limit unnecessary taxes

You can make generation-skipping transfers during your lifetime or at death. During your life, applicable transfers may automatically apply to your lifetime exemption unless you elect otherwise. For transfers at death, you can direct how the exemption is allocated in your will.

GST tax rules can be complex and subject to change. Work with your tax, legal and financial professionals to determine whether and how these strategies fit your estate plan.

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