What Is a Generation-Skipping Trust and When Does It Make Sense?

How the Generation-Skipping Transfer Tax Works

The GST tax applies to transfers of property to a person who is two or more generations below the person making the transfer. When a grandparent transfers assets directly to a grandchild — whether by gift, bequest, or trust distribution — the transfer may be subject to the GST tax in addition to any gift or estate tax that applies.

The GST tax rate is a flat 40%, which is the same as the maximum federal estate tax rate. This can be devastating: a transfer that is subject to both estate tax and GST tax could lose more than half its value to taxes. The GST tax exists precisely to ensure that wealth is taxed at each generational level, preventing families from skipping generations to reduce the overall tax burden.

There are three types of generation-skipping transfers: a direct skip (a transfer directly to a grandchild or lower generation), a taxable distribution (a distribution from a trust to a skip person), and a taxable termination (when a trust's interest in a non-skip person ends, leaving only skip persons as beneficiaries).

The GST Exemption

Every person has a GST exemption that allows them to transfer a certain amount to skip persons without triggering the GST tax. In 2025, the GST exemption is $13.99 million per person — the same as the federal estate tax exemption. A married couple can combine their exemptions to shield up to $27.98 million from the GST tax.

The GST exemption can be allocated to specific transfers or trusts. Once allocated, the exemption amount grows with the trust's assets, potentially sheltering significantly more than the original exemption amount from GST tax over time. Proper allocation of the GST exemption is one of the most important — and most technical — aspects of generation-skipping trust planning.

It is important to note that the current exemption level is historically high. The 2017 Tax Cuts and Jobs Act doubled the exemption, and this increase is scheduled to expire at the end of 2025 unless Congress acts. If the exemption reverts to its pre-2018 level (approximately $7 million, adjusted for inflation), families with estates between $7 million and $14 million could suddenly face GST tax exposure they did not have before.

What Is a Dynasty Trust?

A dynasty trust is a generation-skipping trust designed to last for multiple generations — and in some states, in perpetuity. The traditional rule against perpetuities limited trusts to roughly 90 years (a "life in being" plus 21 years). But many states have now extended or eliminated this rule, allowing trusts to last for centuries or indefinitely.

In a dynasty trust, the grantor funds the trust with assets up to the GST exemption amount. The trust then invests and grows those assets across generations. Each generation of beneficiaries can receive income and distributions from the trust, but because the assets remain in the trust — never becoming part of any beneficiary's estate — they are not subject to estate tax at any beneficiary's death.

Over decades, the compounding effect is significant. A dynasty trust funded with $14 million that earns a modest return could grow to $50 million or $100 million or more over two or three generations — all sheltered from estate and GST taxes. The trust also protects the assets from beneficiaries' creditors, divorcing spouses, and lawsuits.

Who Needs a Generation-Skipping Trust?

Generation-skipping trusts are advanced planning tools for families with substantial wealth. They are most commonly used when the estate is large enough that the GST exemption is a meaningful planning consideration (approaching or exceeding $14 million per person), when the family's goal is to preserve and grow wealth across multiple generations rather than distributing it outright, when asset protection for future generations is a priority, or when the family wants to take advantage of the currently elevated GST exemption before a potential reduction.

For families with estates well below the exemption amount, the GST tax is not a concern, and a generation-skipping trust adds complexity without significant benefit. Standard estate planning tools — revocable trusts, testamentary trusts, and outright bequests — are sufficient.

Planning Considerations

Generation-skipping trust planning is highly technical and requires coordination between the estate planning attorney, the tax advisor, and often a trust company that will serve as trustee across generations. Key considerations include choosing the right state for the trust (states with no state income tax on trusts and favorable perpetuity rules), selecting a trustee structure that can endure for generations, drafting distribution provisions that balance flexibility with protection, and properly allocating the GST exemption to maximize tax-free growth.

The cost of establishing and administering a dynasty trust is higher than standard trust planning. But for families with the wealth to justify it, the multigenerational tax savings can be extraordinary.

The Bottom Line

A generation-skipping trust is one of the most powerful tools in advanced estate planning — but it is not for everyone. It is designed for families with substantial wealth who want to transfer assets across multiple generations while minimizing the combined impact of estate taxes and GST taxes. For families approaching the exemption threshold, the current window of historically high exemption amounts makes this planning particularly urgent. For most other families, standard estate planning tools will serve them well, and the generation-skipping trust is a concept worth understanding but not one they need to implement.