Generation-Skipping Transfer Tax
The Generation-Skipping Transfer (GST) tax is a federal tax imposed at a flat rate of 40% on transfers of wealth to recipients who are two or more generations below the transferor — such as grandchildren or great-grandchildren — designed to prevent wealthy families from avoiding estate tax by passing wealth directly to younger generations. For 2025, the GST tax exemption matches the estate and gift tax exemption at $13.99 million per individual.
The Generation-Skipping Transfer tax was enacted by Congress in 1986 after wealthy families found that leaving assets directly to grandchildren — skipping their children's generation — allowed an entire generation of estate tax to be bypassed. The GST tax closes this loophole by imposing an additional 40% federal tax on generation-skipping transfers, on top of any estate or gift tax already owed.
A generation-skipping transfer can occur in three ways. A direct skip is a transfer to a skip person (a person at least two generations below the transferor, or a trust in which all interests are held by skip persons) that is subject to estate or gift tax. A taxable distribution is a distribution from a trust to a skip person that is not subject to estate or gift tax at the trust level. A taxable termination occurs when all non-skip person interests in a trust terminate and a skip person becomes the sole beneficiary.
For 2025, the GST tax exemption is $13.99 million per individual, the same as the federal estate and gift tax exemption. Spouses can each use their own exemption, and the exemption can be allocated to trusts designed to last multiple generations — commonly called dynasty trusts or GST-exempt trusts. Assets inside a properly structured GST-exempt trust can theoretically pass through multiple generations of beneficiaries without being subject to estate or GST tax again, making the GST exemption an extraordinarily powerful wealth transfer tool for long-term planning.
When a taxable GST transfer occurs, the tax is imposed at a flat 40% rate. There is no graduated rate structure as there is for estate and gift tax — the GST tax rate is always 40% on the taxable amount. The GST tax is filed on Form 709 (for lifetime gifts that are generation-skipping transfers) or on Schedule R of Form 706 (for generation-skipping transfers at death).
Allocation of GST exemption is not automatic — it must be made affirmatively by the transferor or executor. Proper allocation is tracked by filing gift tax returns even in years when no gift tax is owed, and errors in GST exemption allocation are among the most difficult and costly mistakes to unwind in estate planning.
The TCJA-doubled GST exemption, like the estate and gift tax exemption, is scheduled to sunset after December 31, 2025. Families with large estates have been advised by practitioners to use the increased exemption through direct gifts, sales to intentionally defective grantor trusts (IDGTs), or contributions to dynasty trusts before the potential reduction in 2026.