Table of Contents
- What Is a Generation-Skipping Trust (GST)?
- Understanding a Generation-Skipping Trust (GST)
- Taxing the Generation-Skipping Transfer Trust (GST)
- The GST Tax Exemption
- What Are the Benefits of a Generation-Skipping Trust?
- How Much Is the Generation-Skipping Transfer Tax?
- Can You Close a Generation-Skipping Trust?
- The Bottom Line
What Is a Generation-Skipping Trust (GST)?
Let me explain what a generation-skipping trust, or GST, really is. It's a legally binding trust agreement where you, as the grantor, pass your contributed assets directly to your grandchildren, effectively skipping over your own children in the next generation. This setup means the assets avoid the estate taxes that would hit if your children inherited them first, getting taxed only once in the process.
If you have significant assets and savings, I can tell you that generation-skipping trusts are solid tools for preserving your wealth over time.
Key Takeaways
- A generation-skipping trust (GST) is a legally binding agreement in which assets are passed down to the grantor's grandchildren or anyone who's at least 37½ years younger, effectively bypassing the next generation of the grantor's children.
- The children of the grantor avoid the estate taxes that would otherwise be due by skipping the opportunity to receive the assets.
- Generation-skipping trusts are liable for taxation if the amount transferred exceeds a certain annually adjusted threshold.
- The generation-skipping trust tax exclusion is the same as the gift and estate tax lifetime exemption: $13.99 million for single taxpayers in tax year 2025 or $27.98 million for couples filing jointly.
Understanding a Generation-Skipping Trust (GST)
You should know that a generation-skipping trust transfers assets from your estate straight to your grandchildren, without your children ever taking title to them. This skips a whole generation of estate taxes that would apply if the assets went to your children first.
Your grandchildren are the typical beneficiaries, but the recipient doesn't have to be family. It can be anyone at least 37½ years younger than you, as long as they're not your spouse or ex-spouse.
Here's something important: These trusts can still benefit your children financially. You can set it up so they get access to any income generated by the trust's assets, while the assets themselves stay in trust for your grandchildren.
Taxing the Generation-Skipping Transfer Trust (GST)
The generation-skipping transfer tax started in 1976, and it got overhauled in 1986 to close loopholes that let people dodge federal estate taxes. The rates have fluctuated—peaking at 55% in 2001 and 2011, and dropping to 0% in 2010 thanks to the Tax Relief Act.
Exemptions exist to protect those transferring smaller amounts to younger generations from heavy taxes. The American Taxpayer Relief Act of 2012 set a permanent exemption starting at $5 million, adjusted for inflation yearly, so the tax only kicks in above that.
In reality, the GSTT hits the very wealthy because of the high thresholds. You won't face it unless your transfer exceeds $13.99 million as a single taxpayer or $27.98 million for married couples in 2025—this matches the gift and estate tax lifetime exemption.
The GST Tax Exemption
Even with taxes on these transfers, GSTs remain useful for high-net-worth people like you to move wealth at lower tax rates. They got even more effective when President Trump signed the Tax Cuts and Jobs Act on December 22, 2017, doubling the exemption.
The TCJA bumped the estate tax exemption to $11.18 million for singles and $22.36 million for couples starting January 1, 2018, through 2025, with annual inflation adjustments. The top rate stays at 40%.
This expires on January 1, 2026, reverting to pre-Act levels unless Congress acts.
What Are the Benefits of a Generation-Skipping Trust?
A generation-skipping trust cuts estate taxes for ultra-high-net-worth individuals passing down wealth. The transfers go straight to grandchildren or great-grandchildren, taxed only once rather than at each inheritance generation.
How Much Is the Generation-Skipping Transfer Tax?
These transfers face a flat 40% tax rate, but only on amounts exceeding the exemption.
Can You Close a Generation-Skipping Trust?
Typically, a generation-skipping trust is irrevocable, meaning you can't amend or dissolve it after creation. However, a court could dissolve it if a judge finds it was created fraudulently or if you weren't of sound mind at the time.
The Bottom Line
In summary, a generation-skipping trust is a legal tool that lets wealthy individuals like you reduce tax burdens when passing on wealth. It taxes the assets only once as they go to grandchildren or other skipping heirs, avoiding taxes per generation. Since estate taxes target fortunes in the tens of millions, these trusts are mainly for the truly wealthy.
Other articles for you
Intraday trading focuses on securities traded within a single day to capitalize on short-term price movements for quick profits.
The text explains what a dividend rate is, how it's calculated, and related concepts like payout ratios and dividend aristocrats.
FactSet is a financial data and analysis provider for professionals in investment and banking sectors.
A white shoe firm refers to prestigious, established companies in fields like law and finance, originating from Ivy League fashion and carrying connotations of exclusivity and tradition.
A hard fork in blockchain creates a new incompatible chain, often leading to a split and sometimes a new cryptocurrency.
A bag holder is an investor who clings to a failing investment hoping for a rebound, often resulting in total loss.
A zero-cost strategy involves trading or business decisions that incur no upfront expenses to improve efficiency, reduce future costs, or generate returns.
The W-4 form is an IRS document employees use to inform employers how much tax to withhold from paychecks based on personal and financial details.
Assurance services are independent professional reviews by accountants that enhance the reliability of information for better decision-making.
A Goldilocks economy is an ideal balanced state with steady growth, low unemployment, and controlled inflation, avoiding extremes of recession or overheating.