Generation-Skipping Transfer (GST) Tax: What You Need to Know
Generation-skipping transfer (GST) tax is a federal tax on transfers of property that skip a generation of heirs. Its purpose is to prevent wealthy individuals from avoiding estate and gift taxes by transferring assets directly to grandchildren or other “skip persons,” bypassing their children. The GST tax applies in addition to estate and gift taxes and is calculated as a percentage of the transfer’s value.
Benefits of a Generation-Skipping Transfer
Even though the GST tax has financial consequences, it offers strategic advantages for estate planning:
Estate Tax Savings: Reduces or eliminates estate tax liability for skipped generations.
Asset Protection: Shields assets from creditors or lawsuits.
Wealth Continuation: Helps keep wealth in the family for multiple generations.
Property Control: Allows control over how and when beneficiaries receive assets through a trust.
Your individual circumstances determine the benefits. Work with an estate planning attorney to build the right GST plan for your family.
Who Is a “Skip Person”?
A skip person is a beneficiary who is two or more generations younger than the donor — typically a grandchild. By skipping the children’s generation, assets avoid one layer of estate tax.
Since 1986, the IRS has applied a flat GST tax to these transfers. However, older irrevocable trusts may be exempt under a “grandfather clause.” If the parent of a grandchild has already passed away, the child “moves up” a generation, and GST tax does not apply.
GST Tax Rates and Exemptions
The GST tax rate matches the federal estate and gift tax rate — 40% on transfers above the exemption amount.
2023 GST Lifetime Exemption: $12.92 million per person (adjusted annually for inflation)
Annual Gift Tax Exclusion: $17,000 per person per year (double for married couples)
2026 Changes: Without new legislation, the exemption will drop to about $5 million per person (adjusted for inflation).
Some states impose their own GST taxes, often tied to their estate tax laws.
Who Pays the GST Tax?
Direct GST: The trust grantor or estate typically sets aside funds to pay the tax.
Indirect GST: The skip beneficiary (grandchild) may be responsible for the tax, often paying from their inheritance proceeds.
Using the Lifetime GST Exemption
You can use the exemption during your life or at death. Two common strategies include:
Lifetime Gifts: Place up to $12.92 million in a trust for your grandchildren, sheltering future growth from GST and estate tax.
Testamentary Trusts: Leave up to $12.92 million in a trust for your children, which then passes to your grandchildren tax-free upon your children’s deaths.
Because of the high exemption, most families never pay GST tax — but for high-net-worth estates, planning ahead is crucial.
Why Work with an Estate Planning Attorney
GST tax rules are complex and mistakes can be costly. An experienced estate planning attorney can:
Minimize GST and estate tax liability through strategic planning.
Ensure compliance with IRS rules and state laws.
Structure trusts to preserve wealth for multiple generations.
Help file necessary tax forms accurately and on time.
If you have a large estate or want to pass wealth to future generations, professional guidance can protect your legacy.
📞 Call us today at (207) 848-5600 or visit our CONTACT page to schedule a consultation.
