What Is a Generation-Skipping Trust?
In plain English
A generation-skipping trust (GST trust) is an irrevocable trust that transfers assets to beneficiaries who are at least two generations below the grantor — typically grandchildren. By 'skipping' a generation, the trust avoids estate tax at the children's level, potentially saving up to 40% on the transferred wealth. However, transfers exceeding the GST tax exemption (currently $13.99 million per person in 2025) are subject to the generation-skipping transfer tax.
How Does a Generation-Skipping Trust Save Taxes?
Without a GST trust, wealth is potentially taxed at each generational transfer: once when passing from parents to children (up to 40% estate tax), and again from children to grandchildren. A GST trust bypasses the middle generation, eliminating one layer of estate tax. For a $10 million estate, this could save $4 million or more in taxes. The children's generation can still benefit from the trust (through income distributions or use of trust property) without the assets being included in their taxable estates.
What Is the GST Tax Exemption?
Each person has a GST tax exemption (indexed for inflation, currently about $13.99 million) that can be applied to generation-skipping transfers. Transfers within this exemption amount are free from GST tax. Amounts exceeding the exemption are taxed at the highest estate tax rate (currently 40%) in addition to any applicable estate or gift tax. Married couples can combine their exemptions by each creating a GST trust, doubling the tax-free amount. Effective use of the exemption requires careful planning with an estate attorney.
What Are Dynasty Trusts?
A dynasty trust is an extension of the GST concept designed to last for multiple generations — sometimes perpetually. States like Nevada, South Dakota, and Delaware allow trusts to exist for centuries or indefinitely, sheltering wealth from estate tax across many generations. Dynasty trusts combine GST planning with state laws that eliminate the historical "rule against perpetuities." They are the most aggressive form of multi-generational wealth preservation available under current law.
Frequently asked questions
Can the children still benefit from a generation-skipping trust?
Yes. The trust can provide income distributions, loans, or use of trust property (like a family home) to the children's generation. The key is that the trust assets are not included in the children's taxable estates when they die, even though they may benefit from the trust during their lifetimes.
Is the GST exemption going to change?
The current high exemption ($13.99 million per person) is set to sunset after 2025 under current law, potentially dropping to approximately $7 million (adjusted for inflation). Legislation could change this timeline. This potential reduction makes GST planning particularly urgent for high-net-worth families.
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Related terms
Irrevocable Trust
An irrevocable trust permanently transfers assets out of your estate, providing estate tax benefits, creditor protection, and Medicaid planning advantages.
Estate Tax
The federal estate tax applies to the transfer of wealth from a deceased person's estate to heirs when the estate's value exceeds a high exemption threshold. Most estates owe no federal estate tax.
Trust Fund
A trust fund is a legal entity that holds and manages assets on behalf of a beneficiary, with terms set by the person who created and funded it.
Inheritance Tax
An inheritance tax is a state-level tax paid by the person who receives assets from a deceased person's estate, based on the value of the inheritance.
Tax-Deferred
Tax-deferred means taxes on investment earnings or contributions are postponed until a future date — usually retirement — allowing compounding to work on pre-tax dollars in the meantime.