Generation-Skipping Transfer Tax

Why can’t you just leave everything to your grandchildren and skip a whole layer of estate tax? Because Congress saw that coming decades ago. The generation-skipping transfer tax exists for exactly one reason: to stop wealthy families from leapfrogging their children, handing assets straight to grandchildren, and avoiding the estate tax that would otherwise hit at each generation. It’s a backstop, and it’s punishing if you trip it without planning.

What it taxes and why

Normally, wealth gets taxed as it passes down the ladder. You die and your estate may owe tax. Your child dies and their estate may owe tax again. The government collects at each rung. If you skip your child and give directly to a grandchild, you’ve dodged a rung, so the GST tax steps in to charge a separate tax on transfers that “skip” a generation. It applies on top of any gift or estate tax, at the top estate tax rate of 40%. Two layers of 40% tax can vaporize a gift.

A “skip person” is anyone two or more generations below you, a grandchild being the classic case, or an unrelated person more than 37½ years younger. The tax can hit a direct gift, a bequest, or a distribution from a trust to a skip person.

The exemption that makes it manageable

Here’s the relief. You get a GST exemption equal to the federal estate exemption, and for 2026 that’s $15,000,000 per person, $30,000,000 for a married couple. Anything you transfer to grandchildren within that exemption escapes the GST tax entirely. Like the estate exemption, it’s now permanent and begins indexing for inflation in 2027.

That’s a large runway. For most families, the GST tax is a non-issue as long as transfers to grandchildren stay under the exemption and someone properly allocates it on the gift tax return. The allocation is where people stumble. The exemption doesn’t apply itself. If your advisor or attorney fails to allocate GST exemption to a trust that will later pay grandchildren, the tax can ambush the family years down the road.

Where it gets powerful: the dynasty trust

The real strategy isn’t avoiding the GST tax. It’s spending your exemption deliberately to build wealth that outlasts you. Allocate your $15,000,000 of GST exemption to a dynasty trust, and that money, plus all its future growth, can pass to grandchildren and great-grandchildren free of estate and GST tax for generations. You’re not just shielding $15M. You’re shielding everything that $15M becomes over fifty or a hundred years. That’s how old-money families stay old-money families, and it’s available to anyone willing to plan.

The hidden price and the honest caveat

Two cautions. First, “permanent” is a Washington word. The $15M exemption survives until Congress decides otherwise, and the estate tax regime changes with the political weather. Locking in a dynasty trust while the exemption is high is reasonable precisely because you can’t count on it staying high.

Second, and this is the trade most people don’t weigh, assets you move out of your estate into a dynasty trust during life don’t get a step-up in basis at your death. Your grandchildren inherit your original cost basis and the capital gains that ride with it. So the GST and dynasty play wins clearly when you’re over the estate exemption and facing a 40% estate tax, and gets murkier under it, where holding for the step-up may beat moving assets out. That’s the step-up versus lifetime gifting question wearing a dynasty trust costume.

Skipping a generation by accident is expensive. Skipping it on purpose, with the exemption allocated and the trust built, is how a family turns one fortune into many.