Generation-Skipping Trust
A Generation-Skipping Trust (GST Trust) is an irrevocable trust structured to hold assets for the benefit of grandchildren or later generations, funded with the grantor's generation-skipping transfer tax exemption under IRC Chapter 13, so that the trust assets pass to successive generations without being subject to estate tax at each generational level.
The generation-skipping transfer (GST) tax under IRC Chapter 13 was enacted to prevent wealthy families from avoiding estate tax by leaving assets directly to grandchildren or great-grandchildren, bypassing the estate tax that would apply if assets passed sequentially through each generation. The GST tax imposes an additional flat tax equal to the highest estate tax rate (currently 40%) on transfers to skip persons — individuals who are two or more generations below the transferor.
The GST tax exemption mirrors the estate and gift tax exemption ($13.99 million per person in 2025, subject to the same TCJA sunset). By allocating GST exemption to transfers in trust, a grantor can create a trust that is permanently exempt from GST tax — all distributions to grandchildren, great-grandchildren, and beyond occur without triggering the GST tax as long as trust assets remain below the exempted amount plus growth. This is the foundation of the generation-skipping trust strategy.
For GST trust planning to be effective, GST exemption must be properly allocated either automatically (for certain direct skip transfers) or by election on a timely filed gift tax return. Failure to allocate GST exemption when required — or late allocation — can create partially exempt trusts that are administratively complex and planning nightmares. The automatic allocation rules under IRC Section 2632 apply to indirect skip transfers to trusts and to direct skips, but they do not always produce the optimal result and can be overridden by election.
Dynasty trusts are the ultimate expression of GST trust planning — trusts designed to last for multiple generations (or indefinitely, in states that have abolished the rule against perpetuities), sheltering family wealth from estate tax at every generation crossing. The compounding benefit of removing assets from the taxable transfer chain at each generation can be enormous over a 50-100 year time horizon.
Beneficiary designations in GST trusts must be carefully structured. Giving children broad rights over the trust — including general powers of appointment — can cause trust assets to be included in their estates, defeating the GST planning. Trusts typically provide children with income rights and limited powers of appointment (exercisable only in favor of descendants), preserving the GST-exempt status for distributions to grandchildren and beyond.