The generation-skipping transfer tax is a separate 40% federal tax on transfers to grandchildren and other “skip persons” two or more generations below you, on top of any gift or estate tax. Each person has a GST exemption equal to the estate tax exemption, $15,000,000 for 2026, according to the IRS 2026 inflation adjustments, so most families will never pay it. But anyone funding trusts for grandchildren or making large gifts across generations needs to allocate the exemption carefully. Here is how it works.
Generation-Skipping Transfer Tax at a Glance
| Item | 2026 |
|---|---|
| Tax rate | 40% flat rate |
| GST exemption per person | $15,000,000 (indexed for inflation after 2026) |
| Married couple | $30,000,000 if both spouses allocate their own exemption |
| Portable between spouses? | No |
| Annual exclusion | $19,000 per grandchild for outright gifts (direct skips) |
| Reported on | Form 709 (gifts) or Form 706 (estates) |
Who Is a Skip Person?
- A relative two or more generations below you, such as a grandchild or great-niece.
- An unrelated person more than 37½ years younger than you.
- A trust in which all beneficiaries are skip persons.
Predeceased parent exception: If your child has died before the transfer, your grandchild “moves up” a generation and is not a skip person for gifts from you.
The Three Types of Generation-Skipping Transfers
- Direct skip: A gift or bequest directly to a skip person, such as writing a check to a grandchild or leaving money to a grandchild in your will.
- Taxable distribution: A distribution from a trust to a skip person, such as a trust for your children that pays a grandchild.
- Taxable termination: When a non-skip beneficiary’s interest ends and the trust passes to skip persons, such as when your last child dies and the trust continues for grandchildren.
How the GST Exemption Works
You allocate your GST exemption to gifts or trusts on Form 709, or your executor allocates it on Form 706. Automatic allocation rules apply to direct skips and many trusts, but you can elect in or out. Once exemption is allocated to a trust, the trust’s “inclusion ratio” determines how much of every future distribution is exempt. A trust with an inclusion ratio of zero can grow for decades without generation-skipping transfer tax, which is why many families use long-term “dynasty” trusts.
Example
A grandmother gives $3,000,000 to an irrevocable trust for her grandchildren in 2026. Gifts to a trust usually are not present-interest gifts eligible for the annual exclusion, so she files Form 709 and allocates $3,000,000 of her $15,000,000 GST exemption to the trust. The trust has a zero inclusion ratio, and all future growth and distributions to grandchildren are free of generation-skipping transfer tax. Her remaining GST exemption is $12,000,000.
Why the GST Exemption Is Not Portable
A surviving spouse can use a deceased spouse’s unused estate tax exemption through portability, but not the unused GST exemption. Couples who want to pass large amounts to grandchildren often use trusts at the first death so both GST exemptions are used. See the 2026 estate tax exemption.
Planning Strategies
- Pay grandchildren’s tuition or medical bills directly to the provider; these payments are excluded from gift and GST tax.
- Use annual exclusion gifts to grandchildren, structured to qualify for the GST annual exclusion.
- Allocate exemption to dynasty trusts funded with assets expected to appreciate.
- Coordinate GST planning with 529 plans for grandchildren, which can use five years of annual exclusions at once.
- Review older trusts for GST status before making distributions.
See our 2026 gift tax guide and Form 709 guide.
Common Mistakes
- Failing to file Form 709 to allocate exemption to a trust, leaving it partly taxable.
- Assuming the GST exemption is portable.
- Making distributions from a non-exempt trust to grandchildren without considering the tax.
- Ignoring the GST tax when naming grandchildren as IRA or life insurance beneficiaries.
Frequently Asked Questions
What is the generation-skipping transfer tax rate?
40%, the same as the top estate and gift tax rate.
What is the GST exemption for 2026?
$15,000,000 per person, matching the estate tax exemption.
Do gifts to grandchildren always trigger GST tax?
No. Gifts within the annual exclusion, direct payments of tuition and medical expenses, and gifts covered by your GST exemption are not taxed.
Is the GST exemption portable?
No. Each spouse must use their own exemption.
Final Thoughts
The generation-skipping transfer tax affects few families, but it can be costly for those who ignore it. If you are making large gifts to grandchildren or setting up long-term trusts, file Form 709 to allocate exemption and review older trusts with your advisors.
Have questions about how this applies to your situation? Book a free consultation with Aric and get answers from a CPA.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
