Family Allowance

Generation Skipping Transfer Tax

The IRS assesses gift and estate taxes on transfers of assets from the taxpayer to heirs either during life or at death. Another tax assessed by the IRS is the generation skipping transfer tax, or generation skipping tax (GST). This tax is on transfers made to heirs who are more than one generation below the taxpayer, as from grandparent to grandchild or other person who is more than 37 ½ years younger than the transferor. Transfers to your own children are not considered generation-skipping.

The GST was implemented in 1976 to prevent families from avoiding estate taxes at the death of each generation. Before the GST was implemented, individuals could make gifts or bequests to their grandchildren and avoid estate and gift taxes that would otherwise apply. The GST only applies to federal taxes. Each state may also have taxes on transfers made during life or at death.

The GST is equal to the highest federal gift and estate tax rate at the time of the transfer – for example 40% in 2024. This is in addition to any other federal gift or estate tax that is owed. Like the annual gift tax exclusion and the federal estate tax exemption, there are exclusions for transfers to the skip generation. An annual gift of up to $18,000 to your grandchild would be exempt from gift tax and GST. Every person also has a lifetime GST exemption of $13.61 million ($27.22 million for a married couple) in 2024. A married couple could therefore transfer up to $27.22 million to a grandchild or other skip person without having to pay GST. The GST exemption may be used for both outright transfers and transfers in trust for the skip person.

The current GST exemption amount is set to sunset at the end of 2025. As of January 1, 2026 the GST exemption will revert back to the amount allowed in 2017 or about half of what is currently allowed. This is unless Congress acts to change the law again.

Please consult your financial advisor or estate planning attorney to discuss how GST strategies may benefit you.