Generation-Skipping Trust

Generation‑Skipping Trust (GST): Definition and How It’s Taxed

Key takeaways
* A generation‑skipping trust (GST) transfers assets directly to beneficiaries who are at least 37½ years younger than the grantor (commonly grandchildren), effectively bypassing the grantor’s children.
* The goal is to avoid estate taxation at each generation—assets in a GST are generally taxed only once when the generation‑skipping transfer exceeds the available exemption.
* For 2025 the lifetime exemption equals the gift and estate tax exemption: $13.99 million for individuals and $27.98 million for married couples filing jointly.
* Amounts above the exemption are subject to the generation‑skipping transfer tax (GSTT), taxed at a flat rate (effectively 40% on taxable amounts).

What a generation‑skipping trust is
A GST is a trust designed to pass wealth to “skip” generations—most often grandchildren or great‑grandchildren—so the intermediate generation (the grantor’s children) does not take title to the principal. The trust can provide income or limited benefits to the children while preserving the principal for later generations.

Who can receive a generation‑skipping transfer
A generation‑skipping beneficiary is anyone at least 37½ years younger than the grantor and not a spouse or former spouse. Beneficiaries need not be family members, though grandchildren are the most common recipients.

How a GST works in practice
* The grantor funds an irrevocable trust (commonly) with assets intended for skip‑generation beneficiaries.
* The trust can be structured to pay income to the grantor’s children while preserving principal for grandchildren.
* Because children never own the principal, the asset transfer avoids a round of estate taxation that would occur if the children inherited first.

Taxation and exemptions
* The generation‑skipping transfer tax applies when transfers exceed the GST exemption, which is linked to the federal gift and estate tax lifetime exemption.
* For 2025, the exemption amounts are $13.99 million (individual) and $27.98 million (married filing jointly). Amounts above the exemption are subject to tax.
* Taxable generation‑skipping transfers are effectively taxed at a flat rate of about 40% on the portion exceeding the exemption.
* The Tax Cuts and Jobs Act (TCJA) temporarily doubled estate and GST exemptions beginning in 2018; those higher exemption levels are scheduled to revert after 2025 unless Congress acts. Exemption amounts are indexed for inflation while in effect.

Benefits and typical uses
* GSTs are primarily used by high‑net‑worth individuals to preserve multigenerational wealth and reduce cumulative estate taxes.
* They prevent taxation at each generational transfer, so assets can pass to grandchildren or further descendants with fewer tax events.
* They can also protect assets from creditors and control how and when beneficiaries receive principal.

Irrevocability and modification
* Most GSTs are established as irrevocable trusts—once created, they generally cannot be amended or revoked by the grantor.
* In rare cases a trust can be challenged or modified through court action (for example, where fraud or lack of capacity is proven).

Bottom line
Generation‑skipping trusts are specialized tools for transferring substantial wealth across generations while minimizing repeated estate taxation. Because the federal GSTT and exemption thresholds primarily affect very large estates, GSTs are most relevant to high‑net‑worth individuals planning multigenerational wealth transfers. Consult estate and tax counsel when considering a GST, as rules and exemption amounts can change and proper drafting is essential.