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Trust Law/Level V · Tax and legacy/5.3 Generations and charity/Lesson 2

Generation-skipping transfer tax

How the US generation-skipping transfer tax works: who is a skip person, the 3 kinds of taxable transfer, the flat rate and the GST exemption.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Most families owe no GST tax: each person’s 2026 exemption is $15,000,000 (IRC §2631(c)); the catch is that, unlike the estate exclusion, unused GST exemption cannot pass to a surviving spouse through portability.
  2. Pay a grandchild’s tuition or medical bills directly to the provider: such payments are not generation-skipping transfers (IRC §2611(b)(1)) and need no Form 709; money handed to the grandchild instead does not qualify.
  3. Outright gifts to a grandchild up to the $19,000 annual exclusion in 2026 carry a zero inclusion ratio (§2642(c)); gifts in trust qualify only if the trust is for that grandchild alone and would be included in the grandchild’s estate.
  4. If the grandchild’s parent who is the transferor’s descendant has died, the predeceased parent rule (§2651(e)) moves the grandchild up a generation, so no GST tax applies; the parent must be dead when the transfer is first subject to gift or estate tax.
  5. Automatic allocation under §2632 covers lifetime direct skips and many trusts for grandchildren, but review each Form 709: allocations are irrevocable, and electing out for trusts unlikely to benefit skip persons saves exemption for transfers that need it.

MaterialsThe text of IRC §§2611-2613 and §2651, free on law.cornell.eduThe IRS instructions for Form 709 and for Schedule R of Form 706, where GST exemption is allocated and GST tax is reportedA family tree showing each generation, for your own reference

Wonder

  1. If a grandchild’s parent has already died, is a gift to that grandchild still a generation-skipping transfer?
  2. What decides whether a trust is exempt from GST tax for its whole life?
  3. Is a gift made straight to a grandchild treated differently from one made to a trust for that grandchild?

Explore

  1. The US generation-skipping transfer (GST) tax is a separate federal tax on transfers that pass a generation by, for example from a grandparent to a grandchild. Without it, property could reach grandchildren while being taxed in the estate of only one generation. The current GST tax was enacted in the Tax Reform Act of 1986 and is found in IRC §§2601-2663; it replaced an earlier 1976 version, which that Act repealed retroactively. It applies to lifetime gifts and to transfers at death, on top of any gift or estate tax.
  2. A ‘skip person’ is a person assigned to a generation 2 or more below the transferor’s, such as a grandchild or great-grandchild (IRC §2613). A trust is a skip person if all interests in it are held by skip persons. For family members, generations are counted through the family line; for others, by age gaps under IRC §2651. The predeceased parent rule (§2651(e)) moves a grandchild up a generation if the grandchild’s parent who is the transferor’s descendant is dead when the transfer is subject to tax, so a gift to that grandchild is then not a skip.
  3. IRC §2612 defines 3 kinds of generation-skipping transfer. A direct skip is a transfer subject to gift or estate tax made to a skip person, such as an outright gift to a grandchild. A taxable distribution is any other distribution from a trust to a skip person. A taxable termination happens when an interest in a trust ends, by death, lapse of time or otherwise, and afterwards only skip persons hold interests. The person who pays differs: the transferor for most direct skips, the recipient for a taxable distribution and the trustee for a taxable termination (IRC §2603).
  4. The GST tax rate is flat: it equals the maximum federal estate tax rate, currently 40% (IRC §§2001 and 2641), multiplied by the transfer’s ‘inclusion ratio’. The inclusion ratio measures how much of the transfer, or of a trust, is not covered by GST exemption. A trust fully covered by exemption has an inclusion ratio of 0, so no GST tax is due on its distributions or termination, however much it grows. A trust with no exemption allocated has a ratio of 1 and pays the full rate.
  5. Each individual has a GST exemption equal to the basic exclusion amount for the year (IRC §2631(c)): $15,000,000 for 2026 under the One Big Beautiful Bill Act of July 2025. Unlike the estate tax exclusion, unused GST exemption cannot be passed to a surviving spouse through portability. Gifts to a grandchild that fall within the annual exclusion ($19,000 per recipient in 2026) generally carry no GST tax when made outright; gifts in trust qualify only under stricter conditions (IRC §2642(c)).
  6. Exemption is applied by allocation, usually on Form 709 for lifetime gifts and on Form 706 at death. Under IRC §2631(b), an allocation once made is irrevocable. IRC §2632 also allocates exemption automatically to lifetime direct skips and to certain trusts likely to benefit skip persons, unless the transferor elects out, and allocates any exemption left unused at death. Long-term dynasty trusts depend on these rules (lesson 5.3.1). This lesson explains the rules; it does not suggest how anyone should allocate exemption.

Key facts

  • The current US GST tax was enacted in the Tax Reform Act of 1986 and is found in IRC §§2601-2663.
  • A skip person is someone 2 or more generations below the transferor, such as a grandchild, or a trust held only for such people (IRC §2613).
  • The 3 kinds of generation-skipping transfer are direct skips, taxable distributions and taxable terminations (IRC §2612).
  • The GST tax rate is the maximum federal estate tax rate, currently 40%, times the transfer’s inclusion ratio (IRC §2641).
  • The GST exemption equals the basic exclusion amount, $15,000,000 for 2026, and an allocation once made is irrevocable (IRC §2631).
  • Under the predeceased parent rule (IRC §2651(e)), a grandchild whose parent has died is treated as one generation below the transferor.

Exercise nine, six, three, one

9CollectList up to 9 transfers that could reach a younger generation (some families have fewer), such as a gift to a grandchild, a bequest to a grandchild, a trust for children and grandchildren, a payout from a trust to a grandchild or a gift to a much younger friend.
6ClusterSort them into 6 categories: lifetime gifts to grandchildren, bequests to grandchildren, gifts to trusts, payouts from trusts, transfers to people outside the family, and transfers you are unsure about.
3DistillReduce the 6 categories to 3 groups: likely direct skips, likely taxable distributions or terminations, and transfers you would ask a tax adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why the GST tax exists alongside the estate and gift taxes.

Fact check

Dates, figures and claims checked against the published sources listed below.

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