Generation-Skipping Transfer Tax

What is the generation-skipping transfer tax?

The generation-skipping transfer (GST) tax is a federal tax on transfers of property you make, either during life or at death, to an individual who is more than one generation below you. The GST tax affects wealth transfers to your grandchildren or others in your grandchildren's or younger generations. The GST tax is imposed in addition to (not instead of) federal gift and estate tax (estate tax).

The generation-skipping transfer was once used as a way to save estate tax by keeping property out of an intermediate generation. For example, instead of passing property (which would be subject to estate tax) to your son, who would then pass that property (which would be subject to estate tax again) on to his son, you would pass it directly to your grandson, skipping your son. This would subject the transfer to estate tax only once. The Internal Revenue Code has limited this tactic with the GST tax.

You need to be aware of the GST tax if you make cumulative generation-skipping transfers in excess of the GST tax exemption ($15,000,000 in 2026, $13,990,000 in 2025). A flat tax equal to the highest estate tax bracket (40% in 2025 and 2026) is imposed on every transfer you make after your exemption has been exhausted. This could potentially be one of the largest expenses your estate may have to pay. In addition, it means that a significant part of your estate may go to the federal government and not to your loved ones.

The GST tax is triggered by any transfer made to a skip person, either outright or by the establishment of a trust.

A skip person is a person who is more than one generation below you (e.g., a grandchild or a grandnephew) or a trust in which all the beneficiaries are skip persons. Not surprisingly, a nonskip person is any person or trust who is not a skip person (e.g., your spouse, sibling, or child).

Currently, some states impose their own GST tax. Check with an attorney or your state's department of revenue or department of taxation to find out if the generation-skipping transfers you make are subject to a state GST tax, and how and when to file a return.

What is subject to the GST tax?

Direct skips

A direct skip is a transfer made to a skip person that is subject to federal gift and estate tax. A transfer to a trust is considered a direct skip if all the beneficiaries with an interest in the trust are skip persons.

A direct skip is tax exclusive. This means that the GST tax is imposed only on the amount received and is not part of the tax base. The transferor (or his or her estate) is liable for GST tax on a direct skip. If the direct skip is made to a trust, the trustee is liable for the tax. If the direct skip is made at death, your personal representative is generally liable for the tax. The amount subject to tax is the value of the property or interest in the property received by the beneficiary (reduced by the amount paid for the property, if any).

The GST tax you pay on a direct skip gift increases the amount of the taxable gift for gift tax purposes by the amount of the tax. Likewise, the GST tax paid by your estate is part of your gross estate for estate tax purposes if you make a direct skip at death.

Say that Hal dies in 2026. Hal's will provided that $1,000 went to his grandson Joey, a skip person, and that any GST tax would be paid from the estate residue. Hal's bequest is a direct skip, subject to the GST tax. Assume Hal has already used up his GST tax exemption. Joey received the full $1,000. Hal's personal representative paid the GST tax of $400 ($1,000 x 40%). The $1,000 bequest and the $400 GST tax were both subject to the federal gift and estate tax.

Taxable termination

A taxable termination is a termination of an interest in a trust that results in a skip person or persons holding all the interests in the trust. Termination can result from death, lapse, time, release of a power, or other events.

Phil created a trust and funded it with $1 million. He did not allocate any of his GST tax exemption to the trust. The terms of the trust provided that Phil's daughter Marlene, a nonskip person, was to receive the income from the trust for 10 years, and then the principal (the remainder)would go to Phil's granddaughter Susan, a skip person. A taxable termination will occur after 10 years, when Marlene's interest in the trust terminates and only Susan's interest remains.

However, there is no taxable termination if estate taxes are imposed on the nonskip person.

Assume the same facts as above, except that Marlene had an income interest for life and also has a general power of appointment over the trust property at her death. Marlene dies. The value of the trust is includable in Marlene's gross estate for federal gift and estate tax purposes. A taxable termination has not occurred. Note that a direct skip would occur, however, if the trust property passed to Marlene's grandchildren at her death.

The taxable amount of a taxable termination is the value of all property over which the termination has occurred. As opposed to the direct skip, a taxable termination is tax inclusive. That means that the GST tax is part of the taxable amount. For instance, in the above example, assuming that the trust has a value of $1 million at Marlene's death, the GST tax due is $400,000 (40% of $1 million). Susan would receive $600,000 ($1 million - $400,000) (assume no other variables). The trustee is liable for the tax.

Certain partial taxable terminations are treated as taxable terminations rather than taxable distributions. If a property interest in a trust terminates because of the death of your lineal descendant (e.g., a child), and if a specified portion of the trust is distributed to at least one skip person, then such partial termination is a taxable termination with respect to that portion.

Bill sets up a trust that provides that income be paid to his children, Joan and David. The terms of the trust further provide that when the first child dies, half of the trust principal is to be distributed to Bill's grandchildren. The other half of the principal is to be paid to Bill's grandchildren after the second child dies. Joan dies. The distribution to Bill's grandchildren is a taxable termination (not a taxable distribution) because it is a distribution that occurs as a result of the death of Joan (Bill's lineal descendant).

A taxable termination can also be a direct skip. A taxable termination that is also a direct skip is treated as a direct skip.

Taxable distributions

A taxable distribution is any distribution (other than a direct skip or a taxable termination) of income or principal from a trust to a skip person (or from a trust to another trust if all interests in the second trust are held by skip persons) that is not otherwise subject to federal gift and estate tax. (Generally, gift and estate tax is owed when the trust is funded, not when the funds are distributed.) The amount subject to the GST tax is the value of the property receivable by the distributee (the recipient) less anything the distributee paid for the property. Like a taxable termination, a taxable distribution is tax inclusive (i.e., the GST tax is part of the taxable amount). The distributee is obligated to pay the tax. If the trust pays the tax, the payment will be treated as an additional taxable distribution.

Jane creates a trust and funds it with $1 million. Jane pays gift and estate tax on $1 million at the time she funds the trust (assume no other variables). The terms of the trust provide that the trust income be distributed, at the trustee's discretion, among Jane's husband Hal, her son Ken, her daughter-in-law Sue, and her granddaughter Jill. Any distributions made to Hal, Ken, and Sue are not subject to the GST tax because Hal, Ken, and Sue are not skip persons. Any distributions made to Jill are subject to the GST tax, and Jill is liable for the tax.

What is not subject to the GST tax?

Predeceased parent rule

The predeceased parent rule is an exception to the GST tax. For skips made prior to January 1, 1998, the rule applies to direct skips made to a grandchild whose parents died prior to the transfer. For skips made on or after January 1, 1998, the rule also applies to transfers made to collateral heirs (e.g., a grandnephew) provided that you have no living lineal descendants (e.g., a child or grandchild), and includes direct skips, taxable terminations, and taxable distributions.

On December 1, 1999, Eliot made a taxable gift to his grandson Charles. Charles's father, who was Eliot's son, is deceased at the time that Eliot made the gift. Under the predeceased parent rule, Charles moves up a generation and is treated as though he is Eliot's son for GST tax purposes. No direct skip has occurred because Charles is not treated as a skip person.

Now assume that on January 1, 2026, Sam, who has no living lineal descendants, will transfer property to his grandniece, Abby. Abby's father (Sam's nephew) will be deceased at the time Sam makes the gift. The transfer will not be subject to the GST tax because Abby is not treated as a skip person.

GST tax exemption

All individuals are allowed an exemption from the GST tax, which may be allocated to any property transferred. The GST tax exemption is $15,000,000 (in 2026, $13,990,000 in 2025). You and your spouse each have an exemption, and you can elect to split a transfer of separate property and treat it as half made by each spouse if your spouse consents.

On January 1, 2026, Joseph made a gift of separate property valued at $30,000,000 to his grandchild Ken, whose parents are still living. Joseph's wife Mary consented to split the gift. Joseph and Mary completely insulated the gift from the GST tax by allocating their exemptions to the gift.

Only you or your personal representative can allocate your GST tax exemption. Once made, an allocation is irrevocable. If you (or your representative) do not allocate the GST tax exemption, it will be automatically allocated under default rules, which are unlikely to be what you would have chosen.

Educational and medical expense exclusions

You can pay for a skip person's educational or medical expenses free from the GST tax as long as you make the payments directly to the educational or medical institution.

Transfers that pass free from gift tax under the annual gift tax exclusion

Certain direct skip transfers that are excluded from gift tax because of the annual gift tax exclusion result in no GST tax (because they have an inclusion ratio of zero). You can make outright generation-skipping transfers of up to $19,000 (in 2026 unchanged from 2025) tax free to each of your grandchildren (and to any other skip person you would like to benefit), or double that amount if you elect to gift-split with your spouse, provided that the transfers qualify for the present interest exclusion.

Some gifts to trusts may qualify for the annual gift tax exclusion, but may not be excluded from the GST tax. Annual exclusion gifts to a trust will be excluded from the GST tax only when: (1) the trust is solely for the benefit of a skip person, or (2) the trust assets will be included in the skip person's estate if he or she dies before the end of the trust.

Phoebe sets up a trust, naming her children and grandchildren as beneficiaries. The trust provides for distributions to Phoebe's grandchildren after 10 years and for Phoebe's children to withdraw funds from the trust at any time (so-called Crummey withdrawal rights). The trust further provides that if any of the beneficiaries die, the trust is to be divided equally among the rest of the beneficiaries. The trust terminates after the death of the last child or grandchild. Phoebe funds the trust with $19,000 annually (assume the annual gift tax exclusion amount does not change).

The annual gifts are excluded for gift and estate tax purposes, but not for GST tax purposes because the trust is not solely for the benefit of a skip person, and because the trust assets will not be included in a skip person's estate if he or she dies before the end of the trust term.

How do you compute the GST tax?

The GST tax is computed by multiplying the taxable amount by the applicable rate. The taxable amount is generally the value of property transferred.

Amount x Applicable Rate = Tax

The applicable rate is the maximum federal estate tax rate multiplied by the inclusion ratio.

Maximum Federal Gift and Estate Tax Rate x Inclusion Ratio = Applicable Rate

The inclusion ratio is the excess of one over the applicable fraction.

One Minus Applicable Fraction = Inclusion Ratio

The applicable fraction is computed by dividing the amount of the allocated exemption by the value of the property transferred, reduced by estate taxes actually paid from the transferred property and by charitable deductions allowed with respect to the trust property.

Amount of GST tax Exemption Allocated to Transferred Property

(Value of Property Transferred) (State and Federal Estate Taxes + Charitable Deduction Allowed, If Any)

Jennifer dies in 2026. Seventeen million dollars was transferred to a trust for the benefit of her grandchildren. The transfer is a direct skip, triggering the GST tax. Her entire $15,000,000 exemption is allocated to this trust. No state and federal estate taxes are paid from the property. No charitable deduction is allowed. The GST tax calculation is figured as follows:

GST tax is 4.8% of $17 million or $816,000.

What are the filing requirements?

The filing requirements are as follows:

Prepared by Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc.

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