By Corey W. Moore, Esq.
When planning for tax implication upon death, most client questions revolve around the Federal Estate and Gift Tax and the corresponding exemption ($13,990,000 for 2025).
However, there is potentially another tax that wealthier individuals need to take into consideration when planning their estates, the Generation-Skipping Transfer (GST) Tax. The GST tax applies to transfers of wealth to beneficiaries who are more than one generation below the transferor, such as grandchildren or great-grandchildren. It is designed to prevent wealthy individuals from bypassing estate taxes by passing assets directly to younger generations, thereby “skipping” the intermediate generation—typically their children.
Introduced as part of the Tax Reform Act of 1976, the GST tax ensures that transfers made to skip generations are taxed. The GST tax currently aligns with the Federal Estate and Gift Tax both in permitted exemptions ($13,990,000) and tax rate (40%). The tax applies to both direct transfers, such as gifts or bequests, and indirect transfers, like those made through trusts.
For high-net-worth individuals who desire to minimize the GST tax impact, it is important to use effective strategies like trusts to allocate the GST exemption effectively. The most common strategy is to create a “generation-skipping trust,” which allows assets to pass from one generation to another without triggering taxes, while still benefiting the skipped generation. For example, an individual can create a trust for the benefit of his or her children which does not terminate at any point during the beneficiary’s life and continues for the benefit of the grandchildren. If the GST exemption is allocated to the trust appropriately, the GST tax implications may be lowered or eliminated altogether, thus transferring a significant benefit to the client’s grandchildren.
Overall, the GST tax is an essential consideration for high-net-worth individuals looking to transfer assets across generations. Careful planning can help minimize or avoid this tax, ensuring that wealth is passed down as intended.
