A grandmother wanted to leave money directly to her grandchildren rather than routing it through her own children first — her son and daughter-in-law were financially comfortable, and she felt the money would matter more to the grandchildren’s education and first homes than it would passing through an intermediate generation that didn’t need it. Her instinct ran straight into a piece of tax law written specifically to discourage exactly that move. Congress noticed, decades ago, that wealthy families were skipping a generation on purpose — not out of family preference, but to avoid paying estate tax twice on the same money as it passed from grandparent to parent, then parent to grandchild. They built a tax to close that gap.
The tax that exists because skipping a generation used to be a loophole
The generation-skipping transfer (GST) tax applies to transfers — whether outright gifts, bequests, or transfers into trust — made to a “skip person,” generally someone more than 37.5 years younger than the person making the transfer, most commonly a grandchild.¹ Before this tax existed, a wealthy family could route assets to grandchildren, having those assets taxed once at the grandparent’s death instead of twice — once at the grandparent’s death and again at the parent’s, when normally it would have passed through the parent’s own taxable estate along the way. The GST tax closes that gap by imposing an additional flat tax, currently 40%, on transfers to skip persons, on top of whatever gift or estate tax otherwise applies.²
The exemption that makes generation-skipping trusts possible at all
Here’s what actually makes a generation-skipping trust a viable planning tool rather than just an expensive tax trap: every individual has a lifetime GST exemption, currently $13.99 million for 2025, rising to $15 million in 2026, that can be allocated to transfers made to skip persons, shielding those transfers from the GST tax entirely, up to the exemption amount.³ A generation-skipping trust is simply an irrevocable trust structured to hold assets for grandchildren (or later generations) while the grantor allocates GST exemption to the transfer, so that neither the initial transfer into the trust nor, in a properly drafted “dynasty” version of the trust, future transfers as the trust continues for further generations, triggers GST tax.
This is the detail that makes the strategy genuinely powerful rather than a modest convenience: once a trust is fully allocated GST exemption and structured correctly, the trust’s assets — and all future growth on those assets — can potentially pass down through multiple generations without triggering estate tax or GST tax at each successive death, because the assets are never actually owned outright by any individual generation along the way. The trust owns them; each generation simply benefits from them under the trust’s terms.
Why the middle generation isn’t actually cut out, usually
A common misconception is that a generation-skipping trust literally excludes the middle generation — the grandparent’s own children — from any benefit. In practice, these trusts are frequently drafted to provide income or discretionary distributions to the middle generation during their lifetime, with the remaining principal passing to grandchildren only after the middle generation’s death. The “skip” in generation-skipping refers to which generation’s estate the assets are taxed as part of, not necessarily to which generation receives any benefit at all. A middle generation can receive meaningful support from the trust throughout their life while the assets themselves are never included in that generation’s own taxable estate — that’s the actual mechanism, and it’s considerably more common than a hard cutout of the middle generation entirely.
The annual exclusion works here too, within limits
Direct gifts to a grandchild, and certain gifts to trusts that meet specific requirements, can use the annual gift tax exclusion — $19,000 per recipient in 2025 — without consuming any of the lifetime GST exemption, provided the gift qualifies as a present interest and, for trusts, meets additional GST-specific requirements around vesting.⁴ This allows smaller, ongoing transfers to accumulate over years without needing to touch the larger lifetime exemption at all, reserving that exemption for larger, one-time transfers into a generation-skipping trust structure.
Why this isn’t a strategy for most estates
The GST tax, like the federal estate tax it layers on top of, is only a live concern for estates large enough to be approaching or exceeding the multimillion-dollar exemption thresholds in the first place. For the overwhelming majority of families, a straightforward bequest to children, who then decide independently how to provide for their own children, accomplishes the family’s actual goals without needing a specialized trust built to navigate a tax that, for most estates, was never going to apply.
Sources
1. Congressional Research Service, IF13053, “The Generation-Skipping Transfer Tax (GSTT)” — definition of skip person as an individual more than 37.5 years younger than the transferor, or a trust where all interests are held by skip persons.
2. Congressional Research Service, IF13053 — GST tax imposed at a flat 40% rate on transfers to skip persons, in addition to applicable gift or estate tax.
3. Congressional Research Service, IF13053; 26 U.S. Code § 2631 — lifetime GST exemption of $13.99 million in 2025, rising to $15 million in 2026 under P.L. 119-21; exemption is portable in allocation but not automatically between spouses in the same manner as the estate tax exemption.
4. Internal Revenue Service, annual gift tax exclusion amount ($19,000 per recipient for 2025); 26 U.S. Code § 2642(c) — annual GST exclusion requirements for transfers in trust.
This article is for educational purposes only and does not constitute legal, tax, or financial advice. Generation-skipping trust structuring, GST exemption allocation, and interaction with state rule-against-perpetuities law are highly technical. Consult a licensed estate attorney and tax professional before establishing a generation-skipping trust.
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