How generation-skipping transfer (GST) tax planning works
The federal GST tax adds a 40 percent layer on top of estate and gift tax when wealth passes to your grandchildren or beyond. Allocating your GST exemption — especially to a dynasty trust — is what keeps that tax from quietly eroding a multi-generational plan.
These are the questions that matter most when you’re thinking about GST tax.
What is the GST tax?
The generation-skipping transfer tax is a separate federal tax that lands on top of gift and estate tax. It applies when wealth passes to someone two or more generations below you — most often a grandchild. Its rate is 40 percent, the same as the top estate tax rate. Congress created it to stop families from skipping a generation to dodge a round of estate tax.
A gift to your child
One layer of tax
Passing wealth to your children can face gift or estate tax once, at their generation.
A gift straight to a grandchild
Two layers of tax
Skipping to a grandchild can face gift or estate tax and the 40 percent GST tax on top — unless your exemption covers it.
Who is a “skip person”?
The GST tax uses the term “skip person” for the people it targets. Knowing who counts is the first step in planning around it.
Who counts as a skip person
- Your grandchildren, great-grandchildren, and more distant descendants — the most common skip persons.
- Unrelated people more than 37.5 years younger than you.
- A trust whose beneficiaries are grandchildren and beyond, such as a dynasty trust, which is called a “skip trust.”
- One exception: if your child has died, that child’s children move up a generation and are no longer skip persons.
How does the exemption protect you?
The good news is that everyone has a GST exemption equal to the estate tax exemption — 15 million dollars per person in 2026, or 30 million dollars for a married couple. When you allocate that exemption to a gift or trust, it permanently shields not just the amount you put in but all of its future growth from GST tax. For a dynasty trust, that allocation is everything.
Without a GST allocation
Taxed at every generation
- A dynasty trust is a “skip trust” because grandchildren benefit
- The 40 percent GST tax can apply at each generation
- The multi-generational benefit is largely lost
With the exemption allocated
Sheltered across generations
- The exemption shields the trust and all its future growth
- Wealth can pass generation to generation with no GST tax
- The trust works exactly as it was designed to
Without a GST allocation
The Caldwell trust gets taxed again and again
Bob and Peggy Caldwell set up a trust to benefit their grandchildren. Because the grandchildren benefit, it is a skip trust — and without a GST allocation, the 40 percent GST tax can hit at each generation, shrinking what reaches the family.
With the exemption allocated
The trust does its job
Bob and Peggy allocate their GST exemption when they fund the trust. That shelters the whole trust — and all its future growth — so the money passes down to their grandchildren and beyond without the GST tax taking a bite at each step.
Bob, Peggy, and the Caldwell family are a composite example used to show how the planning works — not a real client.
Should GST planning be part of my plan?
Five short choices. Brent reads your answer back to you at the end.
A 30-second guided quiz. Get a personal read on whether GST planning applies to you.
How Brent helps you
- Spots GST exposure that estate-tax planning alone can miss
- Coordinates GST exemption allocation with your CPA at the time of funding
- Makes sure dynasty trusts and gifts to grandchildren are properly sheltered
- Documents the allocation so it holds up years later when distributions happen
