Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GST tax) is a federal wealth transfer tax designed to prevent wealthy families from avoiding estate tax across multiple generations — by taxing transfers that skip a generation (directly to grandchildren or more remote descendants) or go to unrelated persons more than 37.5 years younger. Without the GST tax, a wealthy family could transfer assets to a grandchild and avoid one full round of estate tax (the generation of the child's parents). The GST tax rate is a flat 40%, and it applies on top of any estate or gift tax already owed — creating a potential combined rate of 68% (40% estate × 60% remaining × 40% GST) if not properly structured. The GST exemption in 2026 is approximately $15 million per person (the same as the estate tax exemption), allowing most families to transfer substantial wealth to grandchildren tax-free. The exemption can be used during life (for direct gifts) or allocated at death; unused exemption does not transfer to a spouse. Trusts structured to benefit multiple generations — "dynasty trusts" — are designed to hold assets in trust for decades or centuries, applying the GST exemption to the initial transfer and sheltering all subsequent appreciation from transfer tax for as long as the trust exists. Several states allow perpetual trusts with no rule against perpetuities.
Current Law (2026)
The GST tax prevents wealthy families from avoiding estate tax by transferring assets directly to grandchildren or more remote descendants, skipping the intermediate generation.
| Parameter | 2026 Value |
|---|---|
| GST exemption | $15 million (same basic amount as the estate tax exemption) |
| GST tax rate | 40% (flat, on top of any estate/gift tax) |
| Exemption per person | Lifetime allocation |
Legal Authority
- 26 U.S.C. § 2601 — Tax imposed on generation-skipping transfers
- 26 U.S.C. § 2602 — Amount of tax
- 26 U.S.C. § 2611 — Generation-skipping transfer defined
- 26 U.S.C. § 2612 — Taxable termination; taxable distribution; direct skip
- 26 U.S.C. § 2631 — GST exemption
How It Works
The GST tax applies to three distinct types of transfers, each triggering the tax differently. A direct skip is the most visible: a gift or bequest made directly to a grandchild or more remote descendant — or to a trust in which no child (non-skip person) has an interest. The GST tax is owed at the same time as any gift or estate tax on the transfer. A taxable termination occurs when a trust interest held by a non-skip person (such as a child) terminates — by death, lapse, or release of a power — and the remaining trust assets pass to or remain held for skip persons (grandchildren). A taxable distribution is any distribution from a trust to a skip person that isn't already a taxable termination or direct skip; the trust pays the GST tax, which reduces what the beneficiary receives.
The GST exemption ($15 million per person in 2026, matching the estate tax basic exclusion) must be affirmatively allocated to transfers on Form 709, the gift tax return. The IRS provides automatic allocation rules that apply to some direct skips and trusts meeting the definition of a "GST trust," but these defaults don't cover all situations. A trust intended to be GST-exempt that lacks proper exemption allocation becomes fully subject to the 40% GST tax when distributions are eventually made to grandchildren — an error that can cost millions and is sometimes irreversible. Confirming your Form 709 allocations with an estate attorney is not optional if you intend to use trusts for multigenerational planning.
Dynasty trusts are the most powerful tool for deploying the GST exemption. In states without a rule against perpetuities — South Dakota, Nevada, Delaware, and Alaska are the most popular jurisdictions — a properly structured trust can last for generations. Assets funded into a dynasty trust with full GST exemption allocation make distributions to children, grandchildren, and beyond without any additional estate or GST tax on the trust corpus or its appreciation. The transfer tax was paid once, at inception; everything inside the trust grows outside the estate tax system indefinitely. This is why wealthy families move tens of millions into these structures during life, while asset values are lower and appreciation can accumulate tax-free in trust.
Unlike the estate tax exemption, the GST exemption is not portable between spouses. A surviving spouse cannot inherit the deceased spouse's unused GST exemption the way they can inherit unused estate tax exemption through the portability election on Form 706. If the first spouse to die doesn't use their $15 million GST exemption through proper trust planning, it is permanently forfeited. For couples with estates above $15 million per person, this distinction makes planning at the first death — typically through a GST-exempt bypass or credit shelter trust — essential to capturing both spouses' full $30 million combined exemption.
How It Affects You
If your estate is likely to exceed $15 million per person: The GST tax applies on top of estate and gift taxes when assets transfer to grandchildren or more remote beneficiaries. The GST exemption ($15 million in 2026) matches the estate tax exemption, and the GST rate is 40% — the same as the top estate tax rate. Without planning, a transfer of $5 million to grandchildren on a taxable estate could face combined estate + GST effective rates approaching 64% (40% estate tax on the gross amount, then 40% GST on the remainder). The time to allocate GST exemption is during lifetime, not at death, when future appreciation in trust assets is already removed from the estate.
If you're establishing a trust for children and grandchildren: Most GST planning centers on irrevocable trusts — particularly dynasty trusts in states without a rule against perpetuities (South Dakota, Nevada, Delaware, Alaska). Grantor trust rules determine whether the trust's income is taxed to the grantor or to the trust itself, which interacts with trust income taxation. A trust properly funded with GST exemption can distribute income to your children tax-free and then pass the principal to grandchildren without additional estate or GST tax. The trust is a perpetual vehicle: assets inside grow and distribute without further transfer tax liability, potentially benefiting multiple generations. Setup requires careful drafting and proper Form 709 exemption allocation.
If you've made gifts to trusts in prior years — watch the exemption allocation trap: GST exemption is not automatically allocated to all transfers — it must be affirmatively allocated on Form 709 (gift tax return). The IRS has increased audits of GST exemption allocation. A trust intended to be GST-exempt that lacks proper allocation is fully subject to 40% GST tax when distributions are made to grandchildren. Confirm with your estate attorney that proper GST exemption allocation was reported on your Form 709. A missed allocation can be catastrophic and is sometimes correctable — but not always.
If you're married and planning GST strategy — exemption is not portable between spouses: Unlike the estate tax exemption (which the surviving spouse can inherit through portability), the GST exemption of a deceased spouse is lost if not used. To preserve both spouses' GST exemptions, a specific trust structure must be used during the first spouse's lifetime or at death — typically a GST-exempt bypass trust. Couples with estates above $15 million per person should ensure their estate plan addresses both federal estate tax portability and GST exemption preservation explicitly.
State Variations
A few states impose their own GST taxes (rare). Most states do not have a separate GST tax — but many do have their own estate or inheritance tax with thresholds far below the federal exemption, which interacts with the step-up in basis rules at death.
Implementing Regulations
- 26 CFR Part 26 — Generation-skipping transfer tax regulations (§§ 26.2601-1 through 26.2663-2 — taxable distributions, taxable terminations, direct skips, GST exemption allocation, inclusion ratio, trust arrangements)
Pending Legislation
- HR 1301 (Rep. Feenstra, R-IA) — Death Tax Repeal Act: would repeal the GST tax entirely, with transition rules for existing trusts. Status: Introduced.
- S 587 (Sen. Thune, R-SD) — Death Tax Repeal Act of 2025: repeals the GST tax and replaces estate/gift framework with new rate brackets. Status: Introduced.
- HR 601 (Rep. Arrington, R-TX) — Estate Tax Rate Reduction Act: would set a uniform 20% rate on generation-skipping transfers. Status: Introduced.
Recent Developments
- 2026 exemption increased to $15 million: The GST exemption matches the 2026 federal basic exclusion amount, giving affluent families a larger amount they can allocate to dynasty trusts and other multigenerational planning structures.
- Repeal proposals: The Death Tax Repeal Act (HR 1301 / S 587) would eliminate the GST tax entirely. The Estate Tax Rate Reduction Act (HR 601) would cut the GST rate from 40% to 20%. Neither has advanced beyond introduction, but both signal the political direction of the Republican majority on transfer taxes.
- Dynasty trust proliferation: States without a rule against perpetuities (South Dakota, Nevada, Alaska, Delaware, among others) continue to attract dynasty trust formations. These trusts, funded with GST exemption, can last indefinitely — sheltering appreciation from estate and GST tax for centuries.
- IRS audit focus: The IRS has increased scrutiny of GST exemption allocation on gift tax returns (Form 709). Improper or missed allocations can have catastrophic consequences — a trust intended to be GST-exempt that lacks proper allocation is fully subject to the 40% GST tax when distributions are made to grandchildren. The IRS's 2024-2025 strategic plan identified transfer tax compliance as a priority area.