Understanding the Generation-Skipping Transfer Tax
When planning for the tax implications of death, many clients focus on the federal estate and gift tax and the applicable exemption amount, which is $13,990,000 for 2025. While these taxes are an important part of estate planning, they are not the only potential consideration for individuals with substantial assets.
Another tax that may apply is the Generation-Skipping Transfer (GST) tax. The GST tax is imposed on transfers of wealth to individuals who are more than one generation below the person making the transfer, such as grandchildren or great-grandchildren. Its purpose is to address situations in which assets pass directly to younger generations, effectively “skipping” the transferor’s children and avoiding estate tax at that intermediate level.
The GST tax was enacted as part of the Tax Reform Act of 1976. Today, it generally mirrors the federal estate and gift tax in both its exemption amount and tax rate. For 2025, the GST exemption is $13,990,000, and transfers exceeding the exemption are taxed at a rate of 40%. The GST tax can apply to direct transfers, such as lifetime gifts or inheritances at death, as well as indirect transfers made through certain types of trusts.
Individuals with larger estates often consider planning techniques that address potential GST tax exposure. One commonly used approach involves allocating the GST exemption to a trust. A generation-skipping trust can be structured to benefit children during their lifetimes and then continue for the benefit of grandchildren or later descendants. When the GST exemption is properly allocated to such a trust, future transfers to skip persons may avoid additional GST tax, allowing assets to remain in trust for multiple generations.
The GST tax is an important part of the broader estate and transfer tax system and may be especially relevant for families seeking to pass wealth across multiple generations. Thoughtful planning can help clarify how and when this tax may apply and support the long-term goals of an estate plan.
