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 maximum rate of 40% 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, so only the portion of skip transfers above that amount is exposed to the tax (Source: IRS Rev. Proc. 2025-32, section 3.14; IRS 2026 inflation adjustments).
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 the GST tax, 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.
The rules interact with the broader estate and gift system. For the annual exemption amounts across all three taxes, Q3 Advisors maintains a companion explainer on the 2026 estate tax exemption. This page focuses on the mechanics unique to skip transfers.
History and purpose of the GST tax
Congress first enacted the generation skipping transfer tax in 1976 and substantially reformed it in 1986 (Source: Cornell Legal Information Institute, Wex, “Generation-Skipping Transfer Tax,” citing IRC Chapter 13). The 1986 overhaul replaced the original 1976 structure with the direct skip, taxable distribution, and taxable termination framework used today. This capsule summarizes the origins of the tax and why it exists, before the sections below cover how it operates now.
The purpose is to close a gap in the estate tax. Estate tax generally applies once per generation as assets pass down. By leaving assets to grandchildren, a family could bypass the child’s generation and avoid one layer of estate tax entirely. The GST tax restores that missing layer.
Who is a skip person?
A skip person is someone assigned to a generation two or more generations below the transferor, or certain trusts 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.
For a person who is not related, generation assignment is based on age. Under the statutory age brackets, an unrelated individual more than 37.5 years younger than the transferor is generally assigned to a lower generation, while a smaller age gap is not (Source: IRC section 2651(d)). This age rule addresses transfers routed through unrelated younger individuals.
The predeceased-parent 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 move-up rule prevents a GST tax where the intervening generation is gone, so a transfer to that grandchild is treated like a transfer to a child (Source: IRC section 2651(e)). This 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 by a different point in the life of a gift or trust. The three events are the direct skip, the taxable distribution, and the taxable termination (Source: 26 CFR 26.2611-1). Which event applies determines who is responsible for reporting and 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 the transfer into the correct category is the first step in any GST analysis, because it drives both the return that gets filed and the party liable for the tax.
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 (Source: IRS Rev. Proc. 2025-32, section 3.14, and 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 multiplied by the transfer’s inclusion ratio. The top estate tax rate under IRC section 2001(c) is 40%. So a fully taxable transfer, meaning one with an inclusion ratio of 1, is taxed at 40% (Source: IRC sections 2641 and 2001).
An important nuance: the 40% is applied to the taxable, non-exempt portion, not always the whole transfer. Where exemption is allocated, the inclusion ratio drops below 1 and the effective rate falls. A trust with exemption allocated to all of its assets can have an inclusion ratio of 0, meaning no GST tax on future distributions.
| 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); annual gift tax exclusion per IRS 2026 inflation adjustments (held at $19,000 for 2026, unchanged from 2025).
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.” 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).
The exemption is not portable between spouses
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 it 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).
Because the exemption is not portable, couples sometimes consider a reverse-QTIP election. That election lets the deceased 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 any particular situation is a factor to weigh with a qualified professional.
Allocating the GST exemption: automatic versus affirmative
GST exemption can be applied to a transfer either automatically by statute or by an affirmative election on a return. For many “GST trusts,” the exemption is allocated automatically unless the transferor elects out on Form 709. For other transfers, exemption is applied 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).
Allocation choices carry consequences under the rules. Allocating too little exemption to a trust leaves a partial inclusion ratio, so future distributions to skip persons can carry GST tax that a full allocation would have avoided. Allocating exemption to a transfer that was never going to skip a generation applies a limited amount to a transfer that did not need it. How allocations appear on filed returns is a factor to review with a qualified professional.
What planning concepts relate to the GST tax?
Several concepts appear in the tax rules that govern GST transfers. They include dynasty trusts, the annual gift tax exclusion, and direct payments of tuition or medical expenses, which are excluded from gift and GST tax as qualified transfers (Source: IRC section 2503(e); IRC section 2611(b)). None is a recommendation, and whether any applies depends on individual facts that a qualified professional can assess. The descriptions below explain how each is defined.
Dynasty trusts
A dynasty trust is a long-term irrevocable trust structured to hold assets for multiple generations while keeping those assets outside the taxable estate of each beneficiary. When a transferor allocates GST exemption to fully fund such a trust, the trust can carry an inclusion ratio of 0, meaning the applicable GST rate on later distributions is 0%, subject to how the trust is drafted and administered (Source: IRC sections 2631 and 2642). The permitted trust term depends on state law, discussed below.
Annual exclusion and 529 acceleration
The annual gift tax exclusion is a per-recipient amount that a person can transfer each year without using lifetime exemption or filing for that gift. For 2026 it is $19,000 per recipient, or $38,000 for a married couple splitting gifts, unchanged from 2025 (Source: IRS 2026 inflation adjustments). A separate rule lets a contributor to a 529 education savings plan elect to treat a lump-sum gift as spread over five years, so up to five times the annual exclusion, $95,000 for an individual or $190,000 for a married couple splitting gifts, can be applied at once against the exclusion (Source: IRC section 529(c)(2)(B)). Families sometimes review these alongside other topics, such as a Roth conversion, as factors to weigh with a qualified professional.
State-level considerations
State law affects transfer planning in two main ways beyond the federal GST rules. First, some states impose their own estate or inheritance taxes with thresholds lower than the federal exemption, and state treatment of generation-skipping transfers varies. Second, states differ on how long a dynasty trust may last: some retain a traditional rule against perpetuities, while others permit very long or effectively perpetual trusts. Trust situs can therefore affect how many generations a trust may benefit. State law varies, so current rules for the relevant state are a factor to confirm with a qualified professional.
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 GST exemption allocations use Form 709; transfers at death and estate-level allocations use Form 706 (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 (Rev. September 2025).
- 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 (Rev. December 2025).
In practice, relatively few transfers reach the GST tax because the $15,000,000 per-person exemption is large enough to cover most gifts and estates. The tax generally becomes relevant only for transfers above that exemption level (Source: exemption level per IRS Rev. Proc. 2025-32, section 3.14). For families near the threshold, related items such as the net investment income tax and required minimum distributions are among the factors to weigh with a qualified professional.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This article is educational and is not advice; for guidance on your own circumstances, consult a qualified tax or financial 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 (Source: IRC sections 2601 and 2641).
How does the generation-skipping transfer tax work?
It works through three taxable events: a direct skip (an outright transfer to a skip person), a taxable distribution (a trust distribution to a skip person), and a taxable termination (a non-skip interest in a trust ending). Each event determines who reports and pays the tax (Source: 26 CFR 26.2611-1).
Who pays the generation-skipping transfer tax?
It depends on the 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 considered 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 died, the grandchild generally moves up a generation and is no longer a skip person (Source: IRC sections 2613 and 2651).
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 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).
What concepts relate to reducing exposure to the generation-skipping transfer tax?
Concepts described in the rules include the $15,000,000 per-person exemption, dynasty trusts, the $19,000 annual gift exclusion, the 529 five-year election, and direct payments of tuition or medical bills, which are excluded as qualified transfers. Whether any concept applies depends on individual facts and is a matter for a qualified professional (Source: IRC sections 2503(e), 2611(b), and 2631).
Is the GST tax exemption portable between spouses?
No. Unlike the estate tax exclusion, the GST exemption is not portable, so an unused amount at the first spouse’s death is generally lost. Couples often address this through a reverse-QTIP election so the first spouse’s exemption is not wasted (Source: IRC sections 2631 and 2652(a)(3)).
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 2001 (estate tax rate): https://www.law.cornell.edu/uscode/text/26/2001
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: https://www.irs.gov/forms-pubs/about-form-709 and About Form 706, 706-GS(D), 706-GS(T)
