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A generation-skipping trust (GST trust) is an irrevocable trust designed to transfer assets to grandchildren or lower generations while minimizing estate taxes. The trust “skips” a generation — your children may benefit from the trust during their lifetimes, but when they die, the assets pass to your grandchildren without being counted in your children’s taxable estates.
Without proper planning, wealth can be taxed at 40% at your death, at 40% again when it passes from your child to your grandchild, and again at each subsequent transfer. A GST trust, combined with the generation-skipping transfer (GST) tax exemption, can break this chain of taxation.
The Generation-Skipping Transfer Tax
Congress created the GST tax specifically to prevent trusts from being used to skip estate taxes across multiple generations. The GST tax applies at a flat 40% rate — the same as the estate tax — on transfers to “skip persons.”
A skip person is someone who is two or more generations below you. Your grandchildren are skip persons. Great-grandchildren are skip persons. Transfers to your children are not subject to GST tax (they are only one generation below you).
In 2026, the GST tax exemption is $13.61 million per person ($27.22 million for a married couple). You can allocate this exemption to transfers to a GST trust, shielding those transfers — and all future distributions from the trust to grandchildren — from the GST tax permanently.
How a Generation-Skipping Trust Works
- You create and fund the trust. You transfer assets to an irrevocable trust, using your lifetime gift tax exemption and allocating your GST exemption to the transfer.
- Your children benefit during their lifetimes. The trust can pay income to your children. It can also distribute principal to them at the trustee’s discretion. But the assets are not in your children’s estates.
- When your children die, the trust passes to grandchildren. No estate tax applies at the children’s death (because the assets are in the trust, not owned by the children). Because you already allocated your GST exemption, no GST tax applies on the distribution to grandchildren either.
- The process can continue to great-grandchildren, limited only by the rule against perpetuities in your state (or not at all if you use a favorable state like South Dakota or Delaware).
Direct Skip vs. Trust Distribution
GST tax can be triggered in two ways:
- Direct skip: A transfer you make directly to a grandchild during your lifetime or at death. Example: leaving $500,000 in your will to a grandchild. The GST tax applies to the amount over your available GST exemption.
- Taxable distribution or termination: When a trust distributes to a skip person, or when all non-skip persons’ interests in a trust terminate and the remaining assets pass to skip persons.
The GST trust structure avoids taxable terminations and distributions by using the GST exemption upfront when the trust is funded. If the exemption covers the entire transfer, no GST tax ever applies — regardless of how the trust later distributes to grandchildren.
GST Exemption Allocation
Allocating your GST exemption is a technical tax step that must be done correctly. You allocate the exemption on gift tax returns (Form 709) in the year you fund the trust. The exemption is “automatic” for certain direct skips, but for trust funding, you should file Form 709 and manually allocate even if no gift tax is due.
If you fail to properly allocate the exemption, distributions to grandchildren may be subject to GST tax even though you had sufficient exemption available. Work with a tax attorney or CPA who handles large gift and estate tax filings.
GST Trust vs. Direct Bequest to Grandchildren
| Feature | GST Trust | Direct Bequest to Grandchildren |
|---|---|---|
| Estate tax at children’s death | No (not in their estate) | Yes (part of child’s estate if given to child first) |
| GST tax | None (if exemption allocated) | Applies above exemption amount |
| Creditor protection | Strong (while in trust) | None (outright ownership) |
| Children benefit during lifetime | Yes (income/discretionary distributions) | No (if given directly to grandchildren) |
| Complexity | High | Low (simple will bequest) |
Who Controls the GST Trust
The trust must have a trustee — not the grantor, and typically not the primary beneficiaries (to preserve creditor protection and tax benefits). Options include:
- Corporate trustee: A bank trust department or independent trust company. Best for long-lasting trusts because the institution can serve indefinitely.
- Family trustee: A trusted family member or friend, typically one generation above the current beneficiaries. Works for shorter-term trusts; succession planning is needed.
- Trust protector: A third party (not the trustee) who has the power to modify the trust, change trustees, or update trust terms. Adds flexibility to rigid irrevocable structures.
GST Trust vs. Dynasty Trust
These terms are often used interchangeably, but they are not exactly the same.
- A dynasty trust is defined by its long duration — it is built to last many generations, often indefinitely in favorable states.
- A generation-skipping trust is defined by its tax structure — it is designed to skip estate tax at one or more generational levels.
A properly structured dynasty trust is almost always also a GST trust (it uses the GST exemption to avoid GST tax on all future distributions). But a GST trust can be structured for a shorter duration — just two or three generations — without being a “dynasty” trust.
The 2025 Exemption Sunset Risk
The current $13.61 million GST exemption was set by the 2017 Tax Cuts and Jobs Act. It was scheduled to revert to approximately $7 million (adjusted for inflation) after December 31, 2025. As of May 2026, Congress has not finalized whether the higher exemption is extended permanently or allowed to sunset.
This creates urgency. If you are planning to use your GST exemption, acting sooner rather than later — while the higher exemption may still be available — is wise. Work with an estate attorney who can advise on current law.
For related strategies, see our guides on dynasty trusts, GRATs, and federal estate tax minimization.
FAQ
What is a generation-skipping trust?
An irrevocable trust that passes wealth to grandchildren or lower generations while avoiding estate tax at the children’s level. It uses the GST tax exemption to permanently shield transfers from the 40% generation-skipping tax.
What is the GST exemption in 2026?
$13.61 million per person, the same as the estate tax exemption. Married couples can combine for $27.22 million total.
Can my children still benefit?
Yes. The trust can pay income to your children for life and distribute principal at the trustee’s discretion. When they die, assets pass to grandchildren with no estate or GST tax (if the exemption was allocated correctly).
What is the difference between a GST trust and a dynasty trust?
A dynasty trust is defined by how long it lasts (potentially forever). A GST trust is defined by how it avoids tax (the GST exemption). Most dynasty trusts are also GST trusts — the two concepts typically go together.
Do I need to allocate the GST exemption when funding the trust?
Yes. File Form 709 in the year you fund the trust and manually allocate the exemption. Failing to do so can result in GST tax on future distributions even if you had enough exemption available.
Rates and exemptions as of May 2026. Estate tax law may change. Consult an estate planning attorney before setting up a generation-skipping trust.
Related: Irrevocable Life Insurance Trust (ILIT): Remove Life Insurance from Your Taxable Estate
Related: Spousal Lifetime Access Trust (SLAT): Estate Planning for Married Couples