Generation-Skipping Transfer Tax Basics

The generation-skipping transfer tax (GST tax) is a federal tax that applies when assets pass from a grantor to a grandchild, great-grandchild, or other “skip person” more than one generation below the grantor—either during the grantor’s lifetime or after death. Combined with the federal-estate-tax, it is designed to prevent unlimited tax-free wealth accumulation across multiple generations.

Who is a skip person

The GST tax pivots on one concept: who is a “skip person” in relation to the grantor. A skip person is anyone who is more than one generation below the grantor—typically a grandchild or great-grandchild. A child is not a skip person; transfers to children face only the gift and estate taxes. But gifts or bequests to a grandchild are subject to the GST tax unless they are exempt.

The IRS assigns generations based on blood relationship. A grandchild is always one generation below a parent, even if the grandchild is older than a younger child of the same grantor. Similarly, a great-grandchild is two generations below the grantor and is a skip person. Adopted children count as blood relatives for this purpose, as do legally recognized stepchildren in certain states.

The three types of GST transfers

The generation-skipping-transfer-tax-basics applies to three categories of transfer:

Direct skips occur when a grantor directly transfers an asset to a skip person—for example, a grandmother gives $50,000 to her grandchild. The transfer is immediately subject to the GST tax unless exempt.

Taxable distributions happen when a trust distributes income or principal to a skip person. If a trust is established for the benefit of a child (the grantor’s child), but then distributes funds to the child’s children (the grantor’s grandchildren), the distribution is a taxable distribution and triggers GST tax.

Taxable terminations occur when a trust interest of a non-skip person ends—for example, when the trust beneficiary (the grantor’s child) dies and the remaining trust assets pass to the next generation. This event is treated as a GST transfer.

Exemption and allocation

Every grantor receives a lifetime GST exemption equal to their federal estate-tax exemption—$13.61 million in 2024, set to fall to approximately $7 million in 2026 under current law. Married couples can combine exemptions, doubling the limit to $27.22 million.

The grantor (or the executor of the grantor’s estate) must affirmatively allocate this exemption to specific transfers using Form 709 (during lifetime) or Form 706 (at death). If the exemption is not allocated, the transfer is fully taxable at 40%.

Example: A grandmother wants to fund a dynasty-trust-multigenerational-wealth for her grandchildren. She contributes $13.61 million and allocates her entire GST exemption to the trust. All future growth and distributions within that trust are GST-tax-free, as long as the trust is properly drafted. If she later contributes an additional $1 million without exemption allocation, that $1 million and its growth are subject to the 40% GST tax.

The exemption and inflation adjustment

The GST exemption adjusts annually for inflation. In recent years it has risen from $12.92 million (2023) to $13.61 million (2024). However, this exemption is temporary under the Tax Cuts and Jobs Act. At the end of 2025, the exemption is scheduled to drop roughly in half (to around $7 million per person, adjusted for inflation).

Families with significant wealth often “use it or lose it” before 2026 by making large exempt gifts or funding irrevocable trusts before the deadline. This is sometimes called “exemption burndown” planning.

The 40% tax rate and its calculation

The GST tax rate is 40%—the highest marginal federal-income-tax rate, matched to the top estate-tax rate. The tax applies to the value of the transfer at the time the transfer occurs.

If a grandchild receives $100,000 in a taxable (non-exempt) direct skip, the GST tax is $40,000, reducing the net transfer to $60,000. Some trusts provide that the grantor (not the skip person) pays the tax, a structure called a “GST-inclusive” approach. Other trusts shift the tax burden to the beneficiary.

Exempt skips and the annual gift exclusion

Annual gifts under the annual-gift-tax-exclusion limit (currently $18,000 per person in 2024) are exempt from the GST tax if they also qualify as “present interests”—meaning the recipient has an immediate right to the gift, not merely a future or contingent claim.

A grandmother might give $18,000 per year to each grandchild without consuming the GST exemption, as long as the gift qualifies for the annual exclusion. This is a popular “low-impact” wealth-transfer tool.

Filing and compliance

To allocate the GST exemption, the grantor must file Form 709 (Gift Tax Return) in the year of the transfer, even if no gift tax is owed. Form 709 is where exemption allocation is reported and documented.

At death, the executor files Form 706 (Estate Tax Return) to allocate any remaining unused exemption to transfers that occur at or after death. If Form 706 is not filed when required, the GST exemption may be forfeited, and the estate loses the ability to make exempt transfers.

The IRS also requires Form 709-A or a GST exemption statement in certain situations to properly track which trusts or transfers are exempt. Mistakes or omissions can be expensive.

Planning considerations

The GST tax is a critical piece of estate-planning for high-net-worth families. Proper use of the dynasty-trust-multigenerational-wealth structure with full exemption allocation can shelter assets from the 40% GST tax for generations.

However, the law is complex and the stakes are high: a single misfiled form or improper trust clause can inadvertently trigger a 40% tax on millions of dollars. Families with substantial assets should work with an estate-planning attorney and tax advisor to ensure that trusts are drafted correctly and exemptions are allocated and documented properly.

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