Generation-Skipping Transfer Tax: The Extra Tax on Gifts to Grandchildren

Skipping a generation when transferring wealth — giving directly to a grandchild instead of a child, or funding a trust that benefits grandchildren — sounds like an obvious way to reduce the number of times an estate gets taxed as it passes down. Congress anticipated exactly that idea decades ago and closed it with a dedicated tax: the generation-skipping transfer (GST) tax, a flat additional levy layered on top of ordinary gift and estate tax whenever a transfer skips a generation.

Why This Tax Exists

Without a separate GST tax, a wealthy family could avoid an entire round of estate taxation by leaving assets directly to grandchildren rather than to children — skipping the taxation that would otherwise apply when the children later died and passed the same assets on to the grandchildren themselves. The GST tax closes this gap by applying its own flat 40% tax on transfers to a "skip person" — generally a grandchild, a more remote descendant, or an unrelated person more than 37.5 years younger than the person making the transfer — once the available GST exemption is used up.

The 2026 GST Exemption

For 2026, the GST exemption is $15,000,000 per individual — matched exactly to the estate and gift tax exemption under OBBBA, and indexed for inflation on the same schedule starting in 2027. A transfer to a skip person that falls within the available GST exemption incurs no GST tax; a transfer above the exemption is taxed at a flat 40% rate, in addition to whatever gift or estate tax already applies to the same transfer.

The Critical Difference From the Estate Tax Exemption: No Portability

This is the single most important distinction to understand, and the one most often confused with the regular estate tax exemption: the GST exemption is not portable between spouses. If the first spouse to die does not use their full GST exemption during life or affirmatively allocate it at death, the unused amount is simply lost — there is no equivalent to the portability election available for the ordinary estate tax exemption, which lets a surviving spouse claim a deceased spouse's unused amount.

This makes proactive planning meaningfully more important for the GST exemption than for the base estate tax exemption alone. A couple relying on portability for their $30,000,000 combined estate tax exemption cannot rely on the same approach for GST purposes — each spouse's $15,000,000 GST exemption generally needs to be used or allocated during that spouse's own lifetime or at their own death to avoid losing it.

How GST Exemption Gets Allocated

GST exemption can be allocated to a lifetime gift (reported on Form 709) or to a bequest at death (reported on Form 706), and allocation is not always automatic — certain transfers require an affirmative election to allocate exemption, while others receive automatic allocation under default rules unless the taxpayer opts out. Missing an allocation, or allocating exemption incorrectly, can leave a trust or gift partially or fully exposed to the 40% GST tax that proper planning would have avoided entirely. This is a technical area where the mechanics genuinely matter and where professional preparation of the relevant gift and estate tax returns is important.

Dynasty Trusts: The Common Vehicle for GST Planning

A dynasty trust is an irrevocable trust structured to hold and grow assets across multiple generations, remaining outside the taxable estates of each successive generation of beneficiaries as the assets pass down. Properly funded with allocated GST exemption, a dynasty trust can shield growth for descendants for as long as the trust is permitted to last under the governing state's rule against perpetuities (some states allow such trusts to last for centuries or indefinitely). The higher $15,000,000 GST exemption under OBBBA makes dynasty trust planning meaningfully more powerful than it was previously — a larger amount can be transferred into a GST-exempt structure in a single generation. See Trusts for Tech Workers for the mechanics of SLATs and other irrevocable trust structures that are sometimes adapted for this kind of multigenerational planning.

Who Actually Needs to Think About This

GST tax planning is most relevant for households with an estate meaningfully above the $15,000,000 federal exemption who are also considering transfers that specifically benefit grandchildren or more remote descendants — whether through direct gifts, a trust naming grandchildren as beneficiaries, or a trust structured to potentially benefit multiple future generations. A straightforward bequest from parent to child, or a gift within the annual exclusion to a grandchild, generally does not raise GST concerns in practice — the tax is aimed at larger, structured transfers that deliberately or effectively skip a generation.

What This Page Does Not Cover

This page covers the GST tax concept and its 2026 exemption amount. For the base estate and gift tax exemption this figure is matched to, see Estate Tax Exemption. For the annual gift exclusion, which is a separate, smaller allowance not directly affected by GST considerations for gifts within the limit, see Gift Tax Annual Exclusion. For the specific trust structures used in multigenerational planning, see Trusts for Tech Workers.

California Note

California has no state-level generation-skipping transfer tax, so GST exposure for California residents is governed entirely by the federal rules described above. Some other states impose their own transfer taxes with different generation-skipping provisions, which matters for California residents holding property in, or considering trusts governed by the law of, another state.

This article is for educational purposes only and does not constitute legal, tax, or financial advice. GST tax rules involve complex exemption allocation mechanics and interact closely with the underlying gift and estate tax rules. Always consult a qualified estate planning attorney before making a significant transfer to a grandchild or more remote descendant, or before funding a trust intended to benefit multiple generations.