Generation-Skipping Transfer Tax
Leaving Money to Grandchildren

Why this tax exists

The federal government imposes an estate tax each time wealth passes from one generation to the next. If you leave your estate to your children, estate tax applies. When your children leave it to their children, estate tax applies again. Each generation pays its share.

But if you skip your children and leave everything directly to your grandchildren, you bypass an entire layer of that tax. The generation-skipping transfer (GST) tax was created to prevent exactly that. It imposes a flat 40% tax on transfers that skip a generation, making sure the tax system collects at each level whether you skip or not.

How the exemption works

Just like the estate tax, you get an exemption. For 2026, the GST exemption is $15 million per person, the same dollar amount as the estate and gift tax exemption. But it is a separate allocation. You can use your estate tax exemption and your GST exemption independently; they do not reduce each other.

One critical difference: the GST exemption does not have portability. If your spouse dies with unused GST exemption, you cannot inherit it the way you can with the estate tax exemption (DSUE). Each spouse must allocate their own GST exemption during their lifetime or at death. If one spouse uses none of it, that $15 million is gone.

Transfers that trigger the tax

The GST tax can be triggered in several ways:

• Direct gifts to grandchildren that exceed the annual exclusion ($19,000 per recipient in 2026) without GST exemption allocated to them
• Bequests to grandchildren at death, if GST exemption is not allocated on the estate tax return
• Distributions from a trust to grandchildren, if the trust is not GST-exempt
• Trust termination where the remaining beneficiaries are all grandchildren or more remote descendants, if the trust is not GST-exempt

Transfers that are exempt

Several types of transfers to grandchildren do not trigger GST tax, regardless of whether you allocate exemption:

• Annual exclusion gifts: direct gifts of up to $19,000 per grandchild per year (2026) are exempt, as long as they are outright gifts (not to a trust) and qualify for the regular gift tax annual exclusion
• Tuition payments: payments made directly to a school for a grandchild’s tuition are exempt from both gift tax and GST tax. The payment must go directly to the educational institution, not to the grandchild
• Medical payments: payments made directly to a medical provider for a grandchild’s medical care are also exempt
• Predeceased parent rule: if your child (the grandchild’s parent) has already died, the grandchild is moved up one generation for GST purposes and is no longer a “skip person.” Transfers to them are not subject to the GST tax

Dynasty trusts

The most powerful use of the GST exemption is a dynasty trust: a trust designed to last for multiple generations, fully exempt from GST tax. You fund the trust, allocate your GST exemption to it, and the assets can grow and be distributed to your children, grandchildren, great-grandchildren, and beyond without ever triggering a transfer tax at any generational level.

The key advantages:

• All growth inside the trust is sheltered. If you fund a dynasty trust with $5 million and it grows to $50 million over several generations, the entire $50 million is GST-exempt
• Distributions to any generation are tax-free from a transfer tax perspective (income tax still applies normally)
• Assets in the trust are generally protected from beneficiaries’ creditors, depending on state law and trust design

State law determines how long a dynasty trust can last. Alabama allows trusts to continue for up to 360 years under the Alabama Uniform Trust Code.

Coordinating with your estate plan

GST planning does not exist in a vacuum. It works alongside your estate and gift tax planning:

• GRATs and GST exemption: allocating GST exemption to a zeroed-out GRAT can be powerful if the GRAT assets outperform the §7520 rate. The appreciation passes to the next generation sheltered from both estate tax and GST tax
• Gift splitting: married couples can elect to split gifts, effectively doubling the amount they can transfer to grandchildren in a given year
• Separate exempt and non-exempt trusts: if you have both children and grandchildren as intended beneficiaries, it is generally better to create separate trusts, one GST-exempt (for multigenerational benefit) and one not (for distributions primarily to children)

What to think about

• If your estate plan includes bequests to grandchildren, make sure your attorney and tax advisor have coordinated the GST exemption allocation
• If you are making lifetime gifts to grandchildren above the annual exclusion, a Form 709 is required and GST exemption should be allocated on that return
• If you already have trusts that benefit grandchildren, find out whether those trusts are GST-exempt. The answer affects every distribution decision
• Remember that GST exemption does not port to your spouse. Both spouses should use their own exemption as part of a coordinated plan

Related services