Generation-Skipping Trust: 2026 GST Tax Planning Guide

The generation-skipping transfer (GST) tax is a 40% federal tax on wealth passed to grandchildren, great-grandchildren, or other "skip persons" — in addition to any estate or gift tax already owed. The OBBBA made the $15M GST exemption per person permanent, so most $5M–$50M families no longer face GST tax on assets within the exemption amount. But for growing estates, business interests, or families with assets that will compound well beyond $15M per person, structuring transfers to minimize the multi-generational GST tax burden is still a high-value planning exercise. A properly funded generation-skipping trust — often structured as a dynasty trust — removes assets from every future generation's estate permanently.

What is the generation-skipping transfer tax?

Congress created the GST tax in 1986 (IRC §§ 2601–2663) to close the "generation skip" loophole wealthy families used to avoid estate tax on each generational death by simply bypassing children and leaving assets directly to grandchildren.¹

The GST tax applies on top of estate and gift taxes. If a grandparent leaves $10M to a grandchild with no planning, the estate pays estate tax first, then the GST tax applies to the same transfer. The combined federal tax burden can reduce the grandchild's inheritance dramatically.

Who is a "skip person"?

The GST tax applies to transfers to "skip persons" — individuals two or more generations below the transferor under IRC § 2613.¹ Generations are based on family relation or, for non-relatives, age differential (37.5 years or more below the transferor).

• Skip persons: Grandchildren, great-grandchildren, grandnephews/nieces, and unrelated individuals 37.5+ years younger than you
• Non-skip persons: Children, siblings, same-generation relatives, and unrelated individuals within 12.5 years of your age
• Predeceased parent rule: If a skip person's parent (your child) is already deceased at the time of transfer, that grandchild "moves up" a generation and is no longer a skip person — the GST tax does not apply (IRC § 2651(e))

Three types of GST-taxable events

The GST tax doesn't just apply at death. It can trigger on three distinct events — and knowing which type of transfer you're making determines who pays the tax and when.

1. Direct skip

A direct skip is a transfer of property directly to a skip person — outright, or to a trust where only skip persons have interests. The transferor (grandparent) pays the GST tax at the time of transfer, in addition to any gift tax.³

Example: Grandmother makes a $2M cash gift directly to her granddaughter. The gift uses $2M of the annual exclusion to the extent available ($19K in 2026), the balance is a taxable gift using lifetime exemption, and the entire $2M is a direct skip subject to GST — unless GST exemption is allocated to the transfer.

Key rule: GST exemption is automatically allocated to lifetime direct skips in most circumstances (IRC § 2632(b)). You can opt out of automatic allocation if you prefer to use exemption elsewhere.

2. Taxable termination

A taxable termination occurs when an interest in a trust terminates (usually at a beneficiary's death) and, immediately after termination, all of the trust's beneficiaries are skip persons. The trust pays the GST tax from trust assets.³

Example: A trust pays income to your child (a non-skip beneficiary) during their lifetime. When your child dies, the remaining trust assets pass to grandchildren — all skip persons. This termination is a taxable termination. GST tax is owed on the trust's value at that moment, unless the trust was funded with GST exemption (inclusion ratio = 0).

3. Taxable distribution

A taxable distribution is any distribution from a trust to a skip person that is not a direct skip or taxable termination. The skip person (the distributee) is responsible for paying the GST tax.³

Example: A trust with both child and grandchild beneficiaries makes a discretionary distribution to the grandchild. That distribution is a taxable distribution if the trust has a non-zero inclusion ratio. The grandchild owes GST tax on the distribution amount.

The inclusion ratio: how much GST tax applies

Not all transfers to skip persons trigger full 40% GST tax. The tax is calculated by multiplying the 40% rate by the trust's or transfer's inclusion ratio.

Inclusion ratio = 1 − Applicable Fraction

Applicable Fraction = GST exemption allocated ÷ value of property transferred

Example: You transfer $10M to a trust and allocate $10M of your GST exemption. The applicable fraction is 10M/10M = 1.0. The inclusion ratio is 1 − 1.0 = 0. The effective GST tax rate is 40% × 0 = 0%. All distributions and terminations from this trust are GST-tax-free — forever, as the trust grows.⁴

Dynasty trust: the primary GST planning vehicle

A dynasty trust is an irrevocable trust structured to last across multiple generations — ideally indefinitely — by settling it in a state that has abolished the Rule Against Perpetuities (RAP). When funded with GST exemption allocated to achieve a zero inclusion ratio, the trust avoids estate tax and GST tax at every generational level for as long as it exists.⁵

How to structure a dynasty trust

1. Choose the right state. South Dakota, Nevada, Delaware, Alaska, and Wyoming have abolished the RAP and permit perpetual trusts. South Dakota and Nevada have no state income tax on trust income in most circumstances, making them the most favorable for long-term compounding. The trust must be governed by the chosen state's law, with a local trustee or trust company serving as institutional trustee.
2. Allocate GST exemption at funding. You must affirmatively allocate your GST exemption to the trust on a timely-filed gift tax return (Form 709). Automatic allocation rules may apply to trusts that qualify as "GST trusts" (IRC § 2632(c)), but filing a return and making an affirmative allocation eliminates ambiguity. The allocation locks in a zero inclusion ratio based on the date-of-transfer value.
3. Structure beneficiary tiers. A well-drafted dynasty trust names current-generation beneficiaries (your children) as primary discretionary beneficiaries, with grandchildren and subsequent generations as remainder beneficiaries. A trust protector can adjust beneficiary classes if circumstances change — critical for trusts expected to last 100+ years.
4. Fund with the right assets. Low-basis appreciated assets (private equity interests, founder stock, closely-held business stakes) are ideal dynasty trust candidates. The trust does not receive a step-up in basis at anyone's death, so assets with low basis but high expected future appreciation benefit more than already-appreciated, liquid assets.

Interactive dynasty trust compounding calculator

Compare what an asset is worth to grandchildren or great-grandchildren if held inside a dynasty trust (zero GST tax at each generation) versus passing outright (40% estate/GST tax at each generational death).

Best assets for a dynasty trust

• Pre-liquidity business interests. Founder stock, LLC membership interests, and partnership interests before a sale event compound inside the trust, and the eventual sale proceeds remain inside the trust — no estate tax, no GST tax on the proceeds or their growth.
• Private equity and venture fund interests. Long-duration illiquid alternative investments with expected 10–15% IRRs compound most effectively when no generational estate tax takes 40% every 25–30 years.
• Closely-held real estate. Combined with a 1031 exchange strategy inside the trust, real estate can grow across generations without estate or GST tax at any level. See the real estate tax planning guide for 1031 mechanics.
• Appreciating public securities. Less ideal because heirs forgo basis step-up, but for assets with very low basis held long-term, the trust's exemption from GST at each generational level outweighs the step-up loss.

GST annual exclusion gifts

Annual exclusion gifts ($19,000 per recipient in 2026) to skip persons can be GST-tax-free only if they qualify as "direct skips" and meet the Crummey withdrawal right requirement for trusts.⁶

Key distinction: the GST annual exclusion for gifts to trusts is different from the gift tax annual exclusion. A gift to a trust for a grandchild only qualifies for the GST annual exclusion if (1) the trust has only one skip-person beneficiary, and (2) if the beneficiary dies before the trust terminates, the trust assets are included in the beneficiary's estate. Most dynasty trusts do not meet these criteria — the GST annual exclusion does not apply to most discretionary, multi-beneficiary dynasty trusts.

Practically: use the $19,000/year annual exclusion for outright gifts to grandchildren (direct skips) or for §2503(c) minor's trusts and properly structured Crummey trusts. Do not assume annual exclusion gifts to a dynasty trust are automatically GST-exempt without attorney review.

Reverse QTIP election

When spouses use a Qualified Terminable Interest Property (QTIP) trust to defer estate tax at the first death, the surviving spouse's GST exemption is often not used. A "reverse QTIP election" under IRC § 2652(a)(3) allows the first-to-die spouse's estate to be treated as the transferor for GST purposes — preserving the first spouse's $15M GST exemption in the QTIP trust rather than losing it.⁷

This is a technical election made on the estate's Form 706. It's easy to miss — and costly to overlook when a QTIP holds assets expected to grow well above the surviving spouse's exemption amount. Estate attorneys who specialize in HNW planning use the reverse QTIP election routinely; it should be on your checklist if you're structuring a marital deduction trust of any size.

Automatic allocation of GST exemption

The IRC has automatic allocation rules designed to allocate GST exemption without requiring an affirmative election (IRC § 2632):¹

• Lifetime direct skips: GST exemption is automatically allocated to lifetime direct skips unless the transferor opts out on a gift tax return. Opt-out is sensible when you want to conserve GST exemption for a dynasty trust allocation instead.
• Indirect skips to GST trusts: Transfers to a "GST trust" (one with skip-person beneficiaries likely to be subject to GST tax) are automatically allocated exemption. This applies to many irrevocable trusts with grandchildren as remainder beneficiaries.
• Testamentary transfers: GST exemption is not automatically allocated to transfers at death — it must be allocated on Form 706 (or via a formula clause in the will). This is a common oversight that estate attorneys must catch.

Important: automatic allocation is not always optimal. If a trust has a mixed inclusion ratio (partially exempt), future taxable events become complicated to calculate. Affirmative allocation on Form 709 and 706 — coordinated with your estate attorney — is always cleaner than relying on automatic rules.

GST planning in context of OBBBA's permanent exemption

With the OBBBA's $15M permanent exemption, the urgency that drove "use it or lose it" GST trust strategies in 2024 has largely passed. But several planning scenarios still warrant dedicated GST attention:

• Growing estates above $30M. A married couple with $25M in assets growing at 8%/year will exceed the $30M combined exemption in roughly 9 years. A dynasty trust funded now locks in the exemption at today's value while allowing all future growth to compound GST-free.
• State estate taxes. Seventeen states impose estate taxes below the federal $15M threshold — Oregon at $1M, Massachusetts at $2M, New York at $7.35M (with a cliff). For high-state-tax families, dynasty trust transfers to skip persons can be structured to avoid both state and federal estate tax at each generational level.
• Illiquid or high-growth business interests. If your estate's main asset is a closely-held business or private equity stake that could grow 3x–10x before a liquidity event, early funding of a dynasty trust (before appreciation) maximizes the tax-free compounding inside the trust.
• Charitable-family combinations. A Charitable Lead Annuity Trust (CLAT) zeroed out for gift tax purposes can also be designed to have a zero inclusion ratio for GST — simultaneously benefiting charity and transferring wealth to grandchildren at minimal tax cost. See the charitable lead trust guide.

Coordinating GST planning with your overall wealth strategy

GST trusts do not operate in isolation. An integrated HNW plan connects them to the broader investment and tax picture:

• GRAT + dynasty trust sequence. Use a GRAT to strip appreciation from a high-growth asset above the §7520 hurdle, then contribute the GRAT remainder to a dynasty trust funded with GST exemption. The GRAT doesn't consume exemption; the dynasty trust captures the tax-free remainder permanently. See the GRAT and irrevocable trust guide.
• Direct indexing inside the trust. A non-grantor dynasty trust (taxable on trust income at compressed 37% brackets beginning at $16,000 of income) benefits from TLH within a direct-indexed SMA to offset capital gains. See the direct indexing guide and the trust income tax planning guide for the bracket compression problem and how to manage it.
• Business exit and pre-close funding. Funding a dynasty trust with closely-held business interests before a sale allows the trust to sell at LTCG rates without the sale triggering estate or GST tax. Coordinate with the business exit planning guide for timing and structure.
• Multi-generational gifting beyond the trust. Annual exclusion gifts ($19K/recipient) and §2503(e) direct tuition and medical payments to grandchildren can supplement the dynasty trust strategy — paying tuition directly to institutions avoids both gift and GST tax with no annual limit. See the multi-generational wealth planning guide.