The generation skipping transfer tax is a separate federal tax on wealth transfers that skip a generation, such as a gift or bequest from a grandparent directly to a grandchild. It applies in addition to gift and estate tax and is imposed at a flat 40% maximum rate on the non-exempt portion of a transfer (Source: IRC Chapter 13, sections 2601 and 2641).
The generation skipping transfer (GST) tax is a flat 40% maximum federal tax on transfers to a skip person, generally a grandchild or a person two or more generations below the transferor. For 2026, each person has a $15,000,000 GST exemption ($30,000,000 for a married couple), so only the portion of skip transfers above that amount is exposed to the tax (Source: IRS Rev. Proc. 2025-32, section 3.14).
What is the generation skipping transfer tax?
The generation skipping transfer tax is a federal transfer tax imposed on gifts and bequests that pass two or more generations below the person making the transfer. Congress created it in Chapter 13 of the Internal Revenue Code, which opens: “A tax is hereby imposed on every generation-skipping transfer” (Source: IRC section 2601). It is distinct from, and stacks on top of, the gift and estate taxes.
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The tax targets a specific move: giving assets directly to a grandchild, or to a trust for a grandchild, instead of passing them through the child. Without it, a wealthy family could hand assets to a grandchild and skip one round of estate tax that would otherwise apply at the child’s death.
Congress first enacted the tax in 1976 and reformed it in 1986, replacing the original structure with the direct skip, taxable distribution, and taxable termination framework still used today (Source: Cornell Legal Information Institute, Wex, “Generation-Skipping Transfer Tax”). The purpose is to restore the layer of estate tax that a skip transfer would otherwise remove. Q3 Advisors maintains a companion explainer on the 2026 estate tax exemption; this page focuses on the mechanics unique to skip transfers.
Who is a skip person?
A skip person is a natural person assigned to a generation two or more generations below the transferor, or a trust benefiting only such persons. The statute defines a skip person as “a natural person assigned to a generation which is 2 or more generations below the generation assignment of the transferor” (Source: IRC section 2613). Grandchildren and great-grandchildren are the classic examples of a skip person.
The 37.5-years-younger rule for unrelated persons
For a person who is not related to the transferor, generation assignment is based on age rather than family tree. Under the statutory age brackets, an unrelated individual more than 37.5 years younger than the transferor is generally treated as a skip person, while a smaller age gap is not (Source: IRC section 2651(d)). This rule prevents families from routing skip transfers through unrelated younger individuals to sidestep the tax.
The predeceased-parent (deceased child) exception
If a grandchild’s parent (the transferor’s child) has already died at the time of the transfer, the grandchild generally moves up one generation and is no longer treated as a skip person for that transfer. The rule prevents a GST tax where the intervening generation is already gone, so the transfer is treated like a transfer to a child (Source: IRC section 2651(e)). This deceased-parent exception often removes GST tax from bequests to grandchildren whose parent predeceased the grandparent.
How does the generation skipping transfer tax work?
The generation skipping transfer tax works through three defined taxable events, each triggered at a different point in the life of a gift or trust: the direct skip, the taxable distribution, and the taxable termination (Source: 26 CFR 26.2611-1). Which event applies determines both the return that gets filed and who is responsible for paying the tax.
| Taxable event | What happens | Who generally pays |
|---|---|---|
| Direct skip | An outright transfer to a skip person, such as a gift or bequest to a grandchild | The transferor (during life) or the estate (at death) |
| Taxable distribution | A trust distributes income or principal to a skip person | The beneficiary (skip person) receiving the distribution |
| Taxable termination | A non-skip interest in a trust ends, leaving only skip persons as beneficiaries | The trustee |
Source for who pays: IRS Instructions for Forms 706-GS(D) and 706-GS(T), 2025. Sorting a transfer into the correct category is the first step in any GST analysis, because it drives both the filing and the party liable.
What is the GST tax rate and exemption for 2026?
For 2026, the GST tax rate is a flat 40% maximum, and each person has a $15,000,000 lifetime GST exemption, up from $13,990,000 in 2025. Because each spouse has a separate exemption, a married couple can shelter up to $30,000,000 combined. The annual gift tax exclusion is $19,000 per recipient for 2026 (Source: IRS Rev. Proc. 2025-32, section 3.14; IRS 2026 inflation adjustments).
The rate is set by statute. Under IRC section 2641, the applicable GST rate equals the maximum federal estate tax rate (40% under IRC section 2001(c)) multiplied by the transfer’s inclusion ratio. A fully taxable transfer, meaning one with an inclusion ratio of 1, is therefore taxed at the flat 40% (Source: IRC sections 2641 and 2001).
| Figure (per person) | 2025 | 2026 |
|---|---|---|
| GST exemption | $13,990,000 | $15,000,000 |
| Married couple combined | $27,980,000 | $30,000,000 |
| GST tax rate (maximum) | 40% | 40% |
| Annual gift tax exclusion | $19,000 | $19,000 |
Source: IRS Rev. Proc. 2024-40 (2025) and Rev. Proc. 2025-32 (2026); the $19,000 annual gift tax exclusion is unchanged from 2025 under the IRS 2026 inflation adjustments.
OBBBA made the $15M exemption permanent
Several older guides still lead with the 2025 figure or describe the $15,000,000 amount as merely “scheduled” or subject to a sunset. That framing is now outdated. The One, Big, Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) amended IRC section 2010(c)(3) to set the basic exclusion amount at $15,000,000 for 2026, and the GST exemption tracks that figure. The amount is permanent and indexed for inflation for years after 2026, with no prior-law sunset (Source: IRS “What’s new, Estate and gift tax,” 2026; Rev. Proc. 2025-32, section 3.14).
How do you avoid or minimize the generation skipping transfer tax?
You can reduce exposure to the generation skipping transfer tax using tools built into the Code: allocating the $15,000,000 GST exemption, giving within the $19,000 annual exclusion, paying tuition or medical bills directly as qualified transfers, and funding a dynasty or GST trust with an inclusion ratio of 0. None of these is a recommendation; whether any applies depends on individual facts a qualified professional can assess (Source: IRC sections 2503(e), 2611(b), 2631, and 2642).
- Allocate the GST exemption. Applying exemption to a transfer or trust lowers its inclusion ratio, so a trust with exemption allocated to all of its assets has an inclusion ratio of 0 and no GST tax on later distributions to skip persons.
- Use the annual gift tax exclusion. A person can transfer $19,000 per recipient in 2026 ($38,000 for a married couple splitting gifts) without using lifetime exemption. Direct skips within the annual exclusion are generally not subject to GST tax.
- Pay tuition and medical costs directly. Amounts paid directly to a school or a medical provider on a skip person’s behalf are qualified transfers, excluded from both gift and GST tax with no dollar limit (Source: IRC section 2503(e)).
- Fund a dynasty (GST) trust. A dynasty trust is a long-term irrevocable trust that holds assets for multiple generations while keeping them outside each beneficiary’s taxable estate. When fully funded with allocated exemption, it can carry an inclusion ratio of 0, so the GST rate on later distributions is 0%.
Worked example. Assume a person who has used none of their exemption makes a $16,000,000 direct skip to a grandchild in 2026. The first $15,000,000 is covered by the GST exemption, leaving a non-exempt portion of $1,000,000. At the flat 40% rate, the GST tax on that transfer is $400,000 ($1,000,000 multiplied by 40%). Had the full transfer stayed at or below the $15,000,000 exemption, the inclusion ratio would be 0 and no GST tax would apply. This illustration is general and does not reflect any individual situation.
How long a dynasty trust may last depends on state law: some states retain a traditional rule against perpetuities, while others permit effectively perpetual trusts, so trust situs affects how many generations a trust benefits. State estate and inheritance taxes and their treatment of skip transfers also vary, so current rules for the relevant state are a factor to confirm with a qualified professional.
Is the GST exemption portable between spouses?
No. Unlike the estate tax exclusion, the GST exemption is not portable between spouses. If one spouse dies without using or affirmatively allocating their GST exemption, the unused amount is generally lost and cannot be transferred to the surviving spouse the way the estate tax exclusion can through a portability election (Source: IRC section 2631; portability under section 2010(c) applies to the estate exclusion only). This gap is where unused exemption is most often wasted.
Because the exemption is not portable, couples sometimes consider a reverse-QTIP election. That election lets the first spouse’s estate treat a QTIP trust as if no marital deduction were taken for GST purposes, so the first spouse’s GST exemption can be applied to that trust rather than left unused (Source: IRC section 2652(a)(3)). Whether this fits a particular situation is a factor to weigh with a qualified professional.
Allocating the GST exemption: automatic versus affirmative
GST exemption is applied to a transfer either automatically by statute or by an affirmative election on a return, and the choice controls the inclusion ratio. For many “GST trusts,” the exemption is allocated automatically unless the transferor elects out on Form 709. For other transfers, exemption applies only if the transferor affirmatively allocates it on Form 709 during life or Form 706 at death (Source: IRC section 2632; IRS Instructions for Form 709, 2025).
The inclusion ratio is why the effective GST rate can be well below 40%, or 0%. The ratio measures the share of a transfer not covered by allocated exemption, and the applicable rate is 40% multiplied by that ratio. Allocating too little exemption leaves a partial inclusion ratio, so future distributions to skip persons can carry GST tax that a full allocation would have avoided (Source: IRC section 2642).
Which IRS forms report the GST tax?
Reporting the generation skipping transfer tax depends on the taxable event and whether it happens during life or at death. Lifetime gifts and exemption allocations use Form 709; transfers at death and estate-level allocations use Form 706; trust-level events use the 706-GS series (Source: IRS, About Form 709 and About Form 706, 2025).
- File Form 709 to report lifetime gifts and to allocate (or elect out of) GST exemption for direct skips and trust transfers made during life.
- File Form 706 to report the estate and allocate GST exemption at death.
- File Form 706-GS(D) when a skip person receives a taxable distribution from a trust.
- File Form 706-GS(T) when a taxable termination occurs, reported by the trustee.
In practice, relatively few transfers reach the GST tax because the $15,000,000 per-person exemption covers most gifts and estates. For families near the threshold, related retirement-tax items such as the net investment income tax, required minimum distributions, the timing of a Roth conversion, and how much to convert to Roth are among the factors many households weigh with a qualified professional.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This page is educational and is not advice; consult a qualified professional.
Frequently asked questions
What is the generation-skipping transfer tax?
The generation-skipping transfer tax is a separate federal tax on transfers that pass two or more generations below the transferor, such as a gift or bequest to a grandchild. It applies in addition to gift and estate tax at a flat 40% maximum rate on the non-exempt portion of the transfer (Source: IRC sections 2601 and 2641).
Who pays the generation-skipping transfer tax?
It depends on the taxable event. On a direct skip, the transferor pays during life or the estate pays at death. On a taxable distribution, the beneficiary (skip person) pays. On a taxable termination, the trustee pays (Source: IRS Instructions for Forms 706-GS(D) and 706-GS(T), 2025).
Who is a skip person?
A skip person is someone two or more generations below the transferor, such as a grandchild or great-grandchild, or an unrelated person more than 37.5 years younger. If a grandchild’s parent has already died, the grandchild generally moves up a generation and is no longer a skip person (Source: IRC sections 2613 and 2651).
How do you avoid the generation-skipping transfer tax?
Exposure is reduced by allocating the $15,000,000 GST exemption, giving within the $19,000 annual exclusion, paying tuition or medical bills directly as qualified transfers, and funding a dynasty trust with an inclusion ratio of 0. Whether any concept applies depends on individual facts and is a matter for a qualified professional (Source: IRC sections 2503(e), 2631, and 2642).
What is the GST tax exemption for 2026?
For 2026, the GST exemption is $15,000,000 per person, or up to $30,000,000 for a married couple, up from $13,990,000 in 2025. The One, Big, Beautiful Bill Act made this amount permanent and inflation-indexed for years after 2026 (Source: IRS Rev. Proc. 2025-32, section 3.14).
What is the generation-skipping transfer tax rate?
The maximum GST tax rate is a flat 40%, equal to the top federal estate tax rate. It applies to the taxable, non-exempt portion of a transfer, so allocating GST exemption can reduce the effective rate below 40% or to zero (Source: IRC sections 2641 and 2001).
Is the generation-skipping transfer tax the same as the estate tax?
No. The GST tax is a separate tax that stacks on top of the estate and gift taxes. It shares the 40% top rate and the $15,000,000 exemption amount for 2026, but the GST exemption is not portable between spouses and applies specifically to skip transfers (Source: IRC Chapter 13; section 2631).
Are transfers to grandchildren always subject to the GST tax?
No. A transfer to a grandchild is exposed to GST tax only above the $15,000,000 exemption, and it is not taxed at all if the grandchild’s parent has died (the deceased-parent exception), if it falls within the $19,000 annual exclusion, or if it is a direct tuition or medical payment (Source: IRC sections 2503(e), 2611(b), and 2651(e)).
Sources
IRS Rev. Proc. 2025-32, section 3.14 (2026 GST exemption): https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
IRS Rev. Proc. 2024-40 (2025 GST exemption): https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
IRS, “What’s new, Estate and gift tax”: https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
IRS, 2026 inflation adjustments (One, Big, Beautiful Bill): https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
IRC section 2601 (tax imposed): https://www.law.cornell.edu/uscode/text/26/2601
IRC section 2613 (skip person): https://www.law.cornell.edu/uscode/text/26/2613
IRC section 2641 (applicable rate): https://www.law.cornell.edu/uscode/text/26/2641
IRC section 2642 (inclusion ratio): https://www.law.cornell.edu/uscode/text/26/2642
IRC section 2651 (generation assignment): https://www.law.cornell.edu/uscode/text/26/2651
26 CFR 26.2611-1 (taxable events): https://www.law.cornell.edu/cfr/text/26/26.2611-1
Cornell Wex, Generation-Skipping Transfer Tax: https://www.law.cornell.edu/wex/generation-skipping_transfer_tax
IRS, About Form 709, Form 706, 706-GS(D), and 706-GS(T): https://www.irs.gov/forms-pubs/about-form-709
