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The Generation-Skipping Transfer (GST) Tax

The generation-skipping transfer (GST) tax is a separate federal tax imposed on transfers of wealth that skip one or more generations — for example, from a grandparent directly to a grandchild, bypassing the children’s generation entirely. Without the GST tax, wealthy families could effectively avoid one full round of estate taxation by passing assets directly to grandchildren rather than children.

Congress enacted the modern GST tax in 1986 as part of the Tax Reform Act. It applies in addition to — not instead of — any gift or estate tax that may be due on the same transfer.

Who Is a “Skip Person”?

A skip person is someone who is assigned to a generation that is two or more generations below the transferor. This includes:

  • Grandchildren and more remote descendants (if the intervening generation is still living)
  • Unrelated individuals more than 37.5 years younger than the transferor
  • Trusts in which all current beneficiaries are skip persons

For transfers to non-family members, generational assignment is based on age difference from the transferor:

Generation Family Donees Non-Family Donees
Transferor’s generation Spouse, siblings No more than 12½ years younger
First younger generation
(one generation removed)		 Children, nieces, nephews and their spouses Between 12½ and 37½ years younger
Second younger generation
(two generations removed — skip persons)		 Grandchildren, grandnieces, grandnephews and their spouses More than 37½ years younger
Predeceased parent exception: If a grandchild’s parent (the transferor’s child) has already died at the time of the transfer, the grandchild moves up a generation and is treated as a non-skip person for GST purposes. This prevents the GST tax from applying when the skip is involuntary.

Three Types of GST Transfers

Direct Skip
A transfer directly to a skip person — for example, a grandparent gives $100,000 directly to a grandchild. Both gift/estate tax and GST tax may apply. The transferor pays the GST tax.
Taxable Termination
A trust in which a non-skip beneficiary’s interest terminates, leaving only skip persons as beneficiaries. The trustee pays the GST tax at the time of termination.
Taxable Distribution
A distribution from a trust to a skip person that is not otherwise subject to estate or gift tax. The skip person (beneficiary) pays the GST tax on the distribution received.

GST Tax Rate & Exemption

The GST tax rate is a flat rate equal to the highest federal estate tax rate — currently 40%. It applies on top of any gift or estate tax already paid, making the combined effective tax rate on generation-skipping transfers potentially very high.

Each individual is entitled to a GST exemption that shields a specified amount of generation-skipping transfers from the GST tax. The GST exemption is unified with the estate and gift tax applicable exclusion amount.

GST Exemption (2024)
$13.61M
Per person • Indexed for inflation
GST Tax Rate
40%
Flat rate on taxable transfers

The GST exemption may be allocated to lifetime transfers, testamentary transfers, or transfers to trusts. Proper allocation of the GST exemption is one of the most technically complex areas of estate planning and typically requires the guidance of a qualified estate planning attorney.

Planning Implications

Example — Dynasty Trust

A grandparent funds an irrevocable trust with $13.61 million and allocates the full GST exemption to the trust. The trust is structured to benefit children, grandchildren, great-grandchildren, and beyond — for as long as state law permits (some states have abolished the rule against perpetuities entirely, allowing trusts to continue indefinitely). Because the GST exemption was properly allocated, no GST tax will ever be imposed on distributions from the trust, regardless of how many generations benefit. The assets can compound and be distributed completely free of transfer tax at each generational level — an extraordinarily powerful wealth transfer vehicle for large estates.

Without the GST exemption, a transfer of $13.61 million directly to grandchildren would be subject to estate or gift tax plus the 40% GST tax, dramatically reducing the amount actually received. Proper GST planning — through dynasty trusts, proper exemption allocation, and coordinated use of the annual exclusion — can preserve substantially more wealth across generations.

Sunset reminder: Like the estate and gift tax exemption, the $13.61 million GST exemption is scheduled to revert to approximately $7 million (inflation-adjusted) after December 31, 2025. Transfers to dynasty trusts or other GST-exempt vehicles should be considered before the potential sunset to lock in the higher exemption.
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