Key takeaways
– A generation‑skipping trust (GST) is an estate‑planning vehicle that moves assets past the grantor’s children to later generations (commonly grandchildren), reducing the number of estate‑tax events.
– Federal generation‑skipping transfer tax (GSTT) applies to transfers that “skip” a generation, but each transfer can use the grantor’s GST exemption. Amounts above the exemption are subject to a flat tax at the top estate tax rate (currently 40%).
– GSTs are usually irrevocable and require careful drafting (trustee selection, distribution standards, funding, exemption allocation). State law (e.g., rules against perpetuities) and changing federal law can affect their benefits.
– Because GST rules are complex and the dollar thresholds change annually and by legislation, always work with an estate attorney and tax advisor.
What is a generation‑skipping trust?
A generation‑skipping trust is a trust designed so that the trust principal ultimately passes to “skip persons” — generally grandchildren or others who are at least 37½ years younger than the grantor — rather than to the grantor’s children. The goal is to have the assets avoid being taxed as part of the children’s estates and therefore be subject to estate tax only once at the generation‑skipping level, rather than at each generational transfer.
How it works (conceptual)
– Grantor creates and usually funds an irrevocable trust.
– Trust terms provide that income and/or principal benefit the children during their lifetimes (if desired) but the remaining principal goes to the grandchildren or other designated skip persons.
– Because the children never take title to the trust principal, that principal does not become part of the children’s taxable estates.
– Transfers to skip persons may be subject to the generation‑skipping transfer tax (GSTT) unless covered by the grantor’s GST exemption.
Who is a “skip person”?
– By statute, a “skip person” is someone at least two or more generations below the transferor (typically grandchildren).
– A specific age‑gap rule (about 37½ years) can determine generation assignment for non‑family or ambiguous cases.
– Spouses and former spouses are not treated as skip persons.
Types of generation‑skipping trusts
– Direct skip (outright gifts): the property goes directly to a skip person — GSTT may be due at transfer unless exemption used.
– Trust designed to skip a generation (commonly called a “GST trust” or dynasty trust): assets stay in trust for multiple generations with distributions per the trust terms.
– Hybrid: children receive income or limited principal distributions during life, with remainder to grandchildren.
Taxation basics
– GSTT: applicable to generation‑skipping transfers not covered by an available GST exemption. The tax rate is generally the highest federal estate tax rate (40% currently).
– GST exemption: each individual has a GST exemption equal to their unified estate/gift tax exemption (amount indexed annually). Transfers covered by the exemption avoid GSTT.
– Filing and allocation: GST exemption must be allocated to the transfer. For gift transfers the allocation is made on Form 709 (gift tax return); for transfers at death it is reported on Form 706 (estate tax return, Schedule R). Automatic allocation rules and elections apply in some situations.
– Estate/gift and GST rules are tied to federal law and to the unified exemption amount, which changes annually and can be affected by legislation (for example, temporary changes under recent tax acts and scheduled sunsets).
Benefits of a generation‑skipping trust
– Potentially large estate‑tax savings for high‑net‑worth individuals by avoiding multiple estate tax events.
– Preservation of family wealth across generations via protective trust terms (creditor protection, spendthrift provisions).
– Flexibility: grantor can provide for children’s needs (income or limited principal) while preserving principal for grandchildren.
– Control of timing and conditions for distribution to later generations.
Common disadvantages and risks
– Complexity and cost of setup and administration (legal and tax fees).
– Irrevocability: most GST trusts are irrevocable, limiting the grantor’s control over assets once transferred.
– Legislative risk: tax law changes (such as sunsets of higher exemptions) may reduce or eliminate anticipated benefits.
– State law limits: some states have rules against perpetual trusts or different estate/gift tax regimes that affect structuring.
Practical steps to set up a generation‑skipping trust (checklist)
1. Clarify goals and quantify assets
– Determine the purpose (tax minimization, asset protection, family control) and estimate the asset value you intend to transfer.
2. Consult professionals
– Engage an experienced estate planning attorney and a tax advisor with GSTT experience early.
3. Decide trust type and main terms
– Choose between a dynasty/long‑term GST trust or a trust that allows children limited benefits.
– Specify beneficiaries, distribution standards (income only vs. principal), successor beneficiaries, and terminating events.
4. Select a trustee(s)
– Choose a trustee (individual, corporate, or co‑trustee structure) with capacity to administer multi‑generation planning.
5. Draft the trust instrument
– Include clauses addressing GST exemption allocation, powers of appointment, spendthrift provisions, trustee powers, trust decanting/termination rules, and state‑law compliance (perpetuities).
6. Fund the trust
– Transfer assets into the trust (outright gifts, funding with life insurance, business interests, real estate, investments). Timing matters to exemption use and valuation.
7. Allocate GST exemption and file required returns
– For lifetime gifts: file Form 709 for the tax year the gift is made and elect to allocate GST exemption as appropriate.
– For death transfers: Form 706 (estate tax return) and Schedule R report GST and exemption allocation. Be aware of automatic allocation rules and deadlines (Form 709 due April 15 after the year of gift; Form 706 due 9 months after death, with possible extension).
8. Maintain documentation and valuations
– Keep thorough records of transfers, valuations, trustee actions and tax filings.
9. Periodically review trust
– Revisit trust provisions and allocations after major life events, tax law changes, or valuation shifts.
Filing forms and deadlines (practical notes)
– Gift transfers: Form 709 (United States Gift (and Generation‑Skipping Transfer) Tax Return) — due by April 15 following the gift year (extensions possible). Use it to allocate GST exemption to lifetime generation‑skipping gifts.
– Transfers at death: Form 706 (United States Estate (and Generation‑Skipping Transfer) Tax Return), including Schedule R for GST computations — due 9 months after date of death (extension available).
– Because the rules for automatic allocation and late allocations are technical, work with a tax attorney or CPA.
Funding strategies commonly used
– Outright gifts to a trust at death or during lifetime.
– Irrevocable life insurance trusts (ILITs) to pay future GST tax or creditor protection while keeping proceeds out of estate.
– Transfers of business or real property interests, with professional valuations to support gift tax and GST calculations.
Can you change or close a generation‑skipping trust?
– Most GSTs are drafted as irrevocable. Modifications or termination generally require:
– Provisions in the trust allowing modification (decanting clauses, trust protector powers), or
– Unanimous consent of beneficiaries under applicable state law, or
– Court approval (reformation, modification, or termination under doctrines like changed circumstances or cy pres).
– Judicial modifications are fact‑specific and may be limited; revocation is rare except where the trust instrument allows it.
Example scenarios (illustrative)
– Example A (income for children, remainder to grandchildren): Parent funds an irrevocable trust; the children receive income during their lifetimes, and at their death the remaining principal passes to grandchildren. The parent allocates GST exemption to the trust at funding so the remainder distributions to grandchildren are sheltered from GSTT (subject to available exemption amount).
– Example B (outright bequest to grandchildren): Parent leaves $7 million outright to grandchildren in a will; if the grantor’s available GST exemption is less than $7M, GSTT may be due on the excess.
Key contingencies and state‑law issues
– Rule against perpetuities / state dynasty trust law: Some states have abolished or extended perpetuity periods, allowing “dynasty trusts” to last many generations. Other states limit duration, which can force distribution and expose assets to future estate tax.
– State estate and inheritance taxes: Some states have their own estate or inheritance taxes with different thresholds — consider state planning.
– Creditor and divorce protection: Trust drafting can enhance protection for future beneficiaries against creditors or divorcing spouses, but local law varies.
Practical tips for high‑net‑worth families
– Coordinate GST planning with lifetime gifting strategy, charitable giving, and marital planning to make efficient use of exemptions and deductions.
– Consider valuation discounts, buy‑sell or family limited partnerships, and leveraging life insurance to provide liquidity for taxes without forcing asset sales.
– Keep flexibility where possible: include trust protectors, decanting provisions, and broad trustee powers to address future tax or family needs.
When to consider a GST
– You have assets that, after using available gift and estate exemptions, still would be subject to significant estate taxes if passed through each generation.
– You want to preserve wealth across multiple generations while limiting exposure to estate taxes and protecting assets from creditors and marital claims.
– You have access to specialized legal and tax advice to structure and maintain a compliant trust.
Bottom line
A generation‑skipping trust is a powerful tool for preserving intergenerational wealth and minimizing cumulative estate taxation for very large estates. Because GST planning interacts with the transfer tax system, exemptions that change annually, and complex filing rules, it is best executed with knowledgeable estate planning counsel and tax professionals. For most families the GSTT is not a practical concern because the exemption thresholds are high; for those with estates large enough to trigger multiple estate tax events, a properly structured GST (or dynasty trust) can produce meaningful tax and non‑tax benefits.
Sources and further reading
– Investopedia, “Generation‑Skipping Trust (GST)” (Michela Buttignol)
– Internal Revenue Service, Estate Tax information and Forms 706 & 709 pages
– Journal of Accountancy, “The Generation‑Skipping Transfer Tax: A Quick Guide”
– Fidelity Investments, “Understanding the Generation‑Skipping Transfer Tax”
– J.P. Morgan Wealth Management, “How Much You Can Gift Tax‑Free Is Set to Be Cut in Half. Are You Ready?”
– Bratton Law Group, “Passing Assets to Grandchildren Through a Generation‑Skipping Trust”
– Husch Blackwell, “Understanding the 2026 Changes to the Estate, Gift, and Generation‑Skipping Tax Exemptions”
(Use the listed resources and your own attorney/tax advisor to confirm current exemption amounts, rates, and filing rules before taking action — figures and laws change over time.)
CONTINUING DISCUSSION: GENERATION-SKIPPING TRUSTS (GSTs)
Key takeaways (brief recap)
– A generation-skipping trust (GST) is a trust designed to transfer wealth to skip a generation (commonly grandchildren), so the transferred assets avoid being taxed at each generational transfer.
– The transfer may be subject to the federal generation-skipping transfer tax (GSTT) at a flat rate (historically 40% in recent years) only for amounts above the GST exemption.
– GST planning is primarily relevant for high-net-worth individuals because the GST exemption is substantial (indexed for inflation and was doubled under the Tax Cuts and Jobs Act through 2025).
– GSTs are usually irrevocable and require careful drafting, administration, and coordination with gift and estate tax filings.
Additional sections, practical steps, examples, and concluding summary follow.
UNDERSTANDING THE GSTT MECHANICS (short primer)
– Who is a skip person: A “skip” beneficiary must be at least 37½ years younger than the transferor (or belong to a generation two or more below the transferor). Spouses and ex-spouses are excluded from being skip persons.
– Types of GSTs: A GST can be a specific irrevocable trust funded during life (inter vivos) or set up to receive assets at death (testamentary). Trusts can be structured to allow income distributions to the grantor’s children while preserving principal for grandchildren.
– Tax interaction: The GSTT is in addition to gift and estate taxes. However, the GST exemption is unified with an individual’s estate and gift tax exemption, meaning allocation choices and filings matter.
THE GST EXEMPTION AND TAX RATES
– Exemption: For recent years the GST exemption has equaled the lifetime gift and estate tax exemption (the amount varies by year and is indexed for inflation). Under recent law through 2025, very large amounts per individual apply (see current-year IRS guidance; amounts cited in earlier sources include $13.99M for individuals in 2025 and $27.98M for married couples using portability/aggregation—confirm current numbers with your tax advisor) (Investopedia; IRS).
– Tax rate: Transfers in excess of the GST exemption are generally taxed at a flat rate (recently 40%) under the GSTT regime (Journal of Accountancy).
– Filing/Allocation: To protect transfers from the GSTT, grantors must allocate GST exemption properly—either on the gift tax return (Form 709) for lifetime gifts or on the estate tax return (Form 706) at death. Proper timely filing and, when beneficial, late allocations with consent, matter.
PRACTICAL STEPS TO CREATE AND FUND A GENERATION-SKIPPING TRUST
1. Define objectives
– Determine whether your primary objective is tax minimization, asset protection, control over timing of distributions, or a combination.
– Decide beneficiaries (grandchildren, great-grandchildren, or nonfamily qualified skip persons) and whether children should receive income rights.
2. Consult qualified advisors
– Engage an estate planning attorney experienced with GSTs, a tax advisor familiar with GSTT reporting, and an experienced trustee (corporate or individual).
– Because GSTT rules are complex and exemptions change, coordination among professionals is essential.
3. Choose trust type and terms
– Typically create an irrevocable trust (inter vivos) when intending to remove assets from the grantor’s estate.
– Draft distribution standards, trustee powers, spendthrift provisions, and successor trustee rules.
– Decide whether children may be beneficiaries of income and whether principal distributions are limited to grandchildren.
4. Allocate GST exemption
– For lifetime transfers, file Form 709 and allocate a portion (or all) of the donor’s GST exemption to the trust to make it “exempt” from GSTT.
– For transfers at death, allocate exemption on Form 706 (estate tax return) and Schedule R for generation-skipping transfers.
5. Fund the trust and document valuation
– Transfer assets (cash, securities, real estate, business interests) into the trust; obtain valuations for complex assets and document transactions for tax reporting.
– Consider timing: lifetime gifts use the gift tax exclusion rules and may not get a step-up in basis (gifts carry the donor’s basis to the recipient), while assets included in estate may receive step-up in basis at death.
6. Maintain records and administer trust
– Trustee maintains records, files required tax returns, makes distributions per trust terms, and obtains professional advice for tax and investment decisions.
EXAMPLES (illustrative numeric scenarios)
Example 1 — Using GST exemption to avoid GSTT
– Grantor A wants to transfer $20 million into a generation-skipping trust for grandchildren.
– Assume A’s available GST exemption is $13.99 million (example 2025 figure). If A timely allocates $13.99M of GST exemption to the transfer on Form 709, then:
– The GST exemption shields $13.99M from GSTT.
– The remaining $6.01M would be subject to GSTT at 40% unless other planning (e.g., portability, additional exemption) applies.
– GSTT on $6.01M = 0.40 x $6.01M = $2.404M.
– Result: Grandchildren receive a trust funded with $20M less any gift taxes and GSTT paid (in practice the donor often pays the tax rather than reducing trust principal).
Example 2 — Transfer at death vs gift during life (basis consequences)
– If Grantor B transfers appreciated stock to a GST during life as a gift, beneficiaries inherit donor’s basis (carryover); capital gains tax will be owed when sold.
– If instead the stock remains in the grantor’s estate and is transferred at death, beneficiaries may receive a step-up in basis to fair market value at death (subject to rules and exceptions).
– Practical implication: Tax and estate planning must consider both transfer taxes and income tax (basis) consequences; sometimes mixed strategies are optimal.
COMMON PITFALLS AND HOW TO AVOID THEM
– Failing to allocate GST exemption or filing late: Without timely allocation, large transfers can trigger GSTT unnecessarily. Solution: file Form 709 for lifetime gifts; make timely decisions and consult counsel.
– Incorrect beneficiary ages/relationships: Misidentifying skip persons or relying on family relationships that disqualify a beneficiary (e.g., spouse) can cause unexpected tax consequences. Solution: confirm generational status and ages; use generation-based definitions in trust drafting.
– Overlooking income tax basis effects: Large lifetime gifts avoid estate tax inclusion but typically result in carryover basis—potentially larger capital gains taxes when assets are sold. Solution: analyze and compare lifetime gifting versus testamentary transfers considering both transfer and income tax effects.
– Lack of trustee competency: A trustee unfamiliar with complex distributions or tax filings can cause compliance failures. Solution: choose trustees with experience or use institutional trustees.
ALTERNATIVES TO A GST
– Dynasty trusts: Long-term trusts designed to last for multiple generations (often combined with GST planning) and usually drafted to be exempt from GSTT by allocating GST exemption.
– Credit shelter (bypass) trusts: Used by married couples to use both spouses’ estate tax exemptions; can be integrated with GST planning for grandchildren distributions.
– Direct gifts with trusts for minors: For smaller gifts that do not trigger GSTT, use custodial accounts or trusts with fewer complexities.
– Family limited partnerships or LLCs: Can shift future appreciation out of an estate; these often require valuations and have distinct tax rules.
ADMINISTRATION, REPORTING, AND CLOSURE
– Reporting: File requisite forms (Form 709 for gifts, Form 706 and Schedule R for estates) and other GST-related returns as required. The trustee must file trust income tax returns (Form 1041) for trust-generated income.
– Trust termination: Most GSTs are irrevocable and cannot be closed or amended without judicial action; if circumstances change, parties can sometimes seek modification in court under state trust modification statutes or decanting statutes, but that is fact-specific and requires counsel.
– Periodic review: Tax law and exemption amounts change; review trust provisions periodically and consider successor planning (e.g., using GST exemption if more favorable laws exist).
PRACTICAL CHECKLIST (for grantors considering a GST)
– Assess total estate and whether GST planning is relevant (usually for very large estates).
– Consult an estate planning attorney and tax advisor with GST experience.
– Decide whether you want income available to children and principal to grandchildren.
– Choose trustee(s) and document trustee powers and distribution standards.
– Plan GST exemption allocation and coordinate with gift/estate tax filings.
– Consider income tax basis consequences and craft timing strategy accordingly.
– Keep documentation and valuations and review periodically.
CONCLUDING SUMMARY
Generation-skipping trusts are powerful estate-planning tools for individuals aiming to transfer significant wealth to grandchildren or other skip persons while minimizing multi-generational transfer taxes. They work best for those with assets large enough to reach or exceed GST and estate/gift tax exemption thresholds. Key considerations include allocation of the GST exemption, the trust’s irrevocable nature, income tax basis consequences, and careful trustee selection and administration. Because exemptions, rates, and rules change over time, a GST should be implemented only after careful coordination with experienced legal and tax professionals.
References and further reading
– Investopedia, “Generation-Skipping Trust (GST)” (Michela Buttignol).
– Internal Revenue Service (IRS), “Estate Tax.”
– Journal of Accountancy, “The Generation-Skipping Transfer Tax: A Quick Guide.”
– Bratton Law Group, “Passing Assets to Grandchildren Through a Generation-Skipping Trust.”
– Husch Blackwell, “Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions.”
– J.P. Morgan Wealth Management, Fidelity Investments, Buchanan materials on gift and estate tax planning.
If you want, I can:
– build a simple worksheet that models GST exemption allocation and GSTT costs for your numbers;
– draft a checklist of documents and questions to take to an estate-planning meeting;
– or walk through a hypothetical family scenario tailored to your situation.
[[END]]