Generation-Skipping Transfer Tax
Also: GSTT, generation-skipping transfer tax, GST tax, generation-skipping tax
A federal tax imposed in addition to gift or estate tax on transfers to beneficiaries two or more generations below the donor. Rate is 40%, with a separate exemption of $13.99 million per individual for 2025.
The Generation-Skipping Transfer Tax applies to gifts or bequests that skip a generation, typically transfers to grandchildren or to trusts benefiting them. The purpose is to prevent families from avoiding estate tax by skipping a generation. The 2025 GST exemption is $13.99 million per person, matched to the estate tax exemption and allocated separately. The GST rate is 40% on transfers above the exemption. Allocation of GST exemption to trusts is made on Form 709 (for lifetime transfers) or Form 706 (at death).
Example: a grandmother sets up a $10 million dynasty trust for her grandchildren. She allocates $10 million of GST exemption. Distributions to grandchildren during the trust term are free of GST tax up to the allocated amount. Future appreciation inside the trust also stays GST-exempt, potentially sheltering tens of millions across generations.
Common mistake: funding a trust for grandchildren without explicitly allocating GST exemption on Form 709. Late allocation is possible but requires careful procedure and risks valuation at the later date.
GST tax matters at dynasty trust design, at testamentary planning for grandchildren, and at gifts skipping a generation for non-tax reasons.