You’ve probably heard about gift and estate taxes. But there’s another tax that might catch you off guard: the generation-skipping transfer tax (GSTT). It kicks in when you give money or assets to grandchildren or other people who are more than one generation younger than you. It’s an extremely complicated area of tax law, but let me try to break it down for you.
What’s the generation-skipping transfer tax?
Here’s the basic idea: When you skip a generation and give assets directly to a grandchild (or anyone more than 37½ years younger than you), the IRS charges a tax on that transfer. The rate is the same as the top estate tax rate—40% in 2026—and it’s on top of any regular gift or estate taxes you might owe.
Why does the GSTT exist? Well, it’s fairly new. The government created this tax back in 1986 because wealthy families were using trusts to pass money down through multiple generations without paying estate taxes at each step. The GSTT put a stop to that.
How much can you give away without triggering this tax?
The good news? There are some breaks:
- Annual gifts: In 2026, you can give up to $19,000 per person per year with no tax. If you’re married, your spouse can give another $19,000 to the same person. So a couple could give $38,000 to each grandchild every year tax-free.
- Education and medical expenses: Direct payments to schools for tuition or to doctors for medical care don’t count as taxable gifts—there’s no limit on these.
- And the big one: your lifetime exemption: In 2026, you can transfer up to $15 million total during your lifetime or at death without owing GSTT (or $30 million if you’re married). This is in addition to your regular estate tax exemption.
Anything beyond that? It gets taxed at 40%.
Important note: A transfer to a skip person can be hit with both regular gift/estate taxes AND the GSTT.
What actually triggers this tax?
The GSTT applies to three situations:
- Direct skips: You give assets straight to a grandchild or a trust for their benefit. You (or your estate) pay the tax when the transfer happens, based on what the grandchild receives.
- Taxable distributions: You set up an irrevocable trust years ago. Now the trust is paying out money to your grandchildren while your kids are still alive. If you didn’t use your GST exemption on the trust initially, this payout is taxable. The grandchild pays the tax when they get the distribution.
- Taxable terminations: An interest in a trust ends (maybe a beneficiary dies, or the trust expires). At that point, money can still go to skip persons, and it wasn’t already taxed. The trustee pays the GSTT.
How do you avoid this tax?
To skip the tax on your initial transfer, you need to use your GSTT exemption. You report this on your gift or estate tax return (gift return if the transfer if during your life, estate return if it’s upon death).
Here’s a nice feature: When you use your GSTT exemption on a trust, the growth on those assets is protected from GSTT forever. For example, if you put $5 million in a trust for your grandchildren and use $5 million of your GSTT exemption, and that trust grows to $20 million, the whole $20 million stays exempt. You only used some of your exemption to protect the full $20 million.
Smart ways to transfer wealth to the next generation
Dynasty trusts: These are irrevocable trusts designed to last for generations (or even indefinitely in some states). You set them up to be completely exempt from GSTT by using your exemption on the initial transfer. After that, distributions and changes to the trust don’t trigger GSTT taxes no matter how much the trust grows. You can combine dynasty trusts with other strategies to create a really powerful wealth transfer plan.
Talk to a tax advisor and/or attorney. These rules are complex, and what works best depends on your situation.