Takeaways
- The generation-skipping transfer (GST) tax applies primarily to very large estates that transfer wealth to grandchildren (or unrelated individuals 37.5+ years younger), ensuring at least one layer of transfer tax is paid.
- The new One Big Beautiful Bill Act permanently increases the GST exemption to $15 million per person starting in 2026 (up from $13.99 million in 2025), meaning most families will not be affected by this tax.
- Despite the high exemption, planning mistakes can lead to a significant 40 percent flat tax on large transfers.
The estate tax gets many headlines and was a focal point in recent negotiations over President Trump’s One Big Beautiful Bill Act (OBBBA). But if you plan to leave property to a grandchild, there’s another tax you should know about that is also affected by the new law: the generation-skipping transfer (GST) tax.
Designed to close a loophole in the estate tax system, the GST tax is a tax on property passed from a grandparent to a grandchild (or great-grandchild) in a will or trust. The tax is also assessed on transfers made to unrelated individuals who are more than 37.5 years younger than the person making the gift.
Since its introduction, the GST tax has been paired with the federal gift and estate tax exemption. Only the value transferred above this exemption amount is subject to the GST tax’s flat 40 percent tax rate.
This high threshold means that most people, just as with the estate tax, will never encounter the GST tax. But for those families that do, even unintentionally, the consequences can be costly. And avoiding surprises takes clear, deliberate planning.
Why the GST Tax Exists and How It Works
Prior to the GST tax, there was no tax rule preventing individuals from avoiding estate and gift taxes indefinitely by leaving assets to future descendants.
Traditionally, grandparents would leave their estates to their children, incurring estate taxes. Then the children would pass on the estates to the grandchildren, incurring estate taxes again. But wealthier families realized they could bypass that middle step by leaving assets directly to grandchildren and avoid an entire layer of tax.
To stop this “generation-skipping” strategy, Congress enacted the GST tax. The tax applies to transfers made to related individuals who are more than one generation below the transferor and to unrelated individuals who are more than 37.5 years younger.
The GST tax ensures that at least one level of transfer tax is paid as property moves down family lines. Here’s how it works:
What It Taxes
The GST tax applies to three types of transfers:
- Direct skips (e.g., a grandparent gifts or bequeaths assets directly to a grandchild)
- Taxable distributions (trust distributions to a skip person)
- Taxable terminations (when a trust’s nonskip beneficiary dies and only skip persons remain)
Understanding which transfers fall into these categories is the first step in spotting GST exposure before it becomes a costly surprise.
Who Counts as a “Skip Person”
- A grandchild or more remote descendant
- Any individual who is 37.5+ years younger than the transferor
- Certain trusts where all beneficiaries are skip persons
Skip-person status isn’t always intuitive (e.g., in blended families), so it’s important to confirm how the rules apply before making large transfers.
GST Exemption
Each person has a lifetime GST exemption of $15 million (as of 2026) that is paired with their federal estate and gift tax exemption. This means the same pool of exemption shields from taxation:
- Lifetime gifts
- Transfers at death
- Generation-skipping transfers
When you use part of your exemption for gifting or estate tax purposes, you reduce the amount available to protect generation-skipping transfers, and vice versa. Only the value of transfers above the remaining exemption is subject to GST tax.
GST Tax Rate
- A flat 40 percent, in addition to any applicable estate or gift tax
Because a generation-skipping transfer may be subject to both the GST tax and the estate or gift tax, even a single misstep can result in a significantly higher overall tax bill.
Nonportability Rule
Unlike the estate and gift tax exemption, the GST exemption is not portable between spouses; each spouse must use it, or it is lost. Failing to use a spouse’s exemption is one of the most common—and most avoidable — GST planning mistakes.
Historical Changes to the GST Tax (and What’s New for 2026)
The GST tax has been with us now for 50 years. During that time, it has undergone a series of changes through tax legislation, most recently in 2025’s OBBBA, with new rules taking effect in 2026.
- 1976 — First generation-skipping tax enacted. Congress created the original GST system in the Tax Reform Act of 1976. It applied mainly to multigenerational trusts and proved too complicated to administer, leading to repeal and replacement.
- 1986 — Modern GST tax established. Congress replaced the original GST tax with the current framework in the Tax Reform Act of 1986, expanding it to cover single-generation gifts and transfers and introducing the concepts of direct skips, taxable distributions, taxable terminations, and the unified GST exemption.
- 2001 — Temporary exemption increases. The Economic Growth and Tax Relief Reconciliation Act of 2001 raised the estate, gift, and GST exemptions and scheduled them to sunset.
- 2012 — Exemption made permanent and indexed. The American Taxpayer Relief Act of 2012 permanently unified the exemptions and set the GST rate at 40 percent.
- 2017 — TCJA temporarily doubles transfer-tax exemptions through 2025. The Tax Cuts and Jobs Act (TCJA) sharply increased the estate, gift, and GST exemptions, but only on a temporary basis. These higher amounts were set to expire at the end of 2025, creating years of uncertainty for long-term planning.
- 2025–2026 — OBBBA permanently increases the exemption. President Trump’s One Big Beautiful Bill Act permanently increases the GST exemption to $15 million per individual beginning January 1, 2026, avoiding the scheduled anticipated drop to roughly $7 million. It also provides annual inflation indexing after 2026 and leaves the GST exemption nonportable.
A consistent legislative theme runs through this history: Congress periodically adjusts the exemption and structure of the GST tax, but the core purpose — ensuring at least one layer of transfer tax on multigenerational wealth transfers — has remained the same.
Due to the high exemption amount, only estates with very large values are affected. To put the number of households subject to the GST tax in perspective, only about 0.07 percent of decedents pay the related federal estate tax.
Where GST Tax Problems Commonly Arise (and How to Avoid Them)
New for 2026, the OBBBA gives the GST tax a rare degree of permanence. Unlike the TCJA, there’s no built-in sunset, and changing the exemption again would require Congress to pass new legislation. And unlike some other OBBBA tax provisions, GST tax changes drew relatively little debate, so most planners expect this framework to remain stable for the foreseeable future — making it all the more important to understand and apply the GST rules correctly under today’s law.
Below are common areas where GST issues arise, paired with practical steps to prevent them.
Failing to Allocate GST Exemption Properly
What goes wrong:
Sometimes a trust is funded with the expectation that the GST exemption will be allocated automatically. However, the rules don’t always treat each transfer as “automatic.” When no exemption is allocated, the trust becomes partially or fully subject to GST tax.
Why it matters:
This can turn routine distributions to grandchildren — or future generations — into taxable events.
How to avoid it:
- Confirm whether automatic allocation applies to each gift.
- Work with a planning professional to ensure your trust is set up as GST-exempt if that is the intent.
- Review older or multidonor trusts where exemption records may be incomplete.
Mixed Beneficiaries or Changing Family Structures
What goes wrong:
Blended families, step-grandchildren, adopted grandchildren, or later-in-life remarriages can affect who counts as a “skip person.” A beneficiary you assume isn’t skip-status may actually be treated as one under the age and relationship rules.
Why it matters:
Misclassifying a beneficiary can make an ordinary distribution unexpectedly taxable.
How to avoid it:
- Review your trust language when family structures change.
- Avoid generic terms like “issue” without clear definitions.
- Consult your attorney any time a new descendant joins the family through marriage or adoption.
Unintentional Skips Through Gifting or 529 Plans
What goes wrong:
Gifts made directly to grandchildren — including contributions to a grandchild’s 529 plan — can be treated as direct skips for GST purposes.
Why it matters:
The gift may require a GST exemption allocation or trigger GST tax if the exemption is already exhausted.
How to avoid it:
- Consider funding education through a GST-exempt trust rather than direct gifts.
- Use the five-year gift tax averaging rule carefully and coordinate GST allocations at the same time.
Taxable Terminations in Older or Nonexempt Trusts
What goes wrong:
A trust appears harmless for years while children are beneficiaries. But once a child dies and only grandchildren remain, the trust may experience a taxable termination, triggering GST tax all at once.
Why it matters:
This frequently comes as a surprise, especially for trusts created decades ago.
How to avoid it:
- Identify any existing trusts that were not made GST-exempt.
- Stress-test the trust terms against likely family scenarios.
- Add powers of appointment or other provisions that allow trust assets to be redirected if needed.
Large Gifts to Younger, Nonfamily Individuals
What goes wrong:
The GST tax applies not only to descendants but also to anyone more than 37.5 years younger than the transferor. Individuals such as caregivers, nieces/nephews/cousins once removed, or close family friends can fall into this category.
Why it matters:
A generous gift to a younger individual may accidentally qualify as a direct skip.
How to avoid it:
- Check the age difference before making large gifts.
- Consider structuring gifts through annual exclusions or non-GST-exempt trusts to manage exposure.
Losing a Spouse’s GST Exemption
What goes wrong:
Families may assume, incorrectly, that their unused GST exemption “rolls over” to the surviving spouse like the estate tax exemption does.
Why it matters:
GST exemption is not portable. If a spouse dies without using theirs, it’s gone forever.
How to avoid it:
- Use bypass trusts or other structures to capture each spouse’s exemption.
- Coordinate estate and GST planning rather than treating them separately.
Mixing Exempt and Nonexempt Assets in the Same Trust
What goes wrong:
Additional contributions made to an existing GST-exempt trust after 2026 may dilute the trust’s inclusion ratio and create a “mixed” trust — part exempt, part taxable.
Why it matters:
Mixed trusts complicate administration and can create unexpected tax exposure decades later.
How to avoid it:
- Avoid adding assets to a GST-exempt trust unless the gift will also be GST-exempt.
- If needed, create a separate trust for new contributions to keep inclusion ratios clean.
Choosing the Wrong State for Long-Term Trusts
What goes wrong:
Some states allow dynasty trusts to last indefinitely; others still enforce traditional Rule Against Perpetuities limits. Moving a trust or appointing a new trustee can unintentionally change the governing law.
Why it matters:
A trust meant to last for multiple generations may not legally be able to do so, undermining GST planning.
How to avoid it:
- Choose a trust jurisdiction intentionally.
- Build in trust protector provisions for flexibility.
- Review situs if trustees or beneficiaries relocate.
A Good Time to Revisit Your Estate Plan
The OBBBA doesn’t just change the GST tax. It also updates several other tax rules that may affect how your estate plan works. That makes this an ideal time to look over your financial and legal documents and make sure your planning strategies fully incorporate today’s law.
Even if the GST tax won’t apply to you, a quick review can catch other issues, such as outdated beneficiaries, old executors, or planning strategies built around rules from years ago. Changes in the law are a natural checkpoint, providing an opportunity to confirm that your plan still does what you expect it to do and protects the people you intend it to protect.
For more information please call Ergood Law, LLC on (856)266-9525.
