Generation-Skipping Transfer Tax (GST)

The GST tax exists because, without it, a wealthy family could transfer assets directly to grandchildren or into long-term trusts, bypassing one full round of estate taxation that would otherwise occur at the children's deaths. Congress layered the GST tax on top of the gift tax and estate tax specifically to close this route. Each transferor has a GST exemption: its amount is tied to the unified lifetime exemption and changes with law, and it can be allocated to shield transfers from the tax.

Consider a hypothetical family where a grandparent funds a trust designed to benefit grandchildren and great-grandchildren for several generations. Without proper GST exemption allocation, distributions from that trust to "skip persons" (those two or more generations below the grantor) could trigger a GST tax on top of any other applicable transfer tax. The combined effect can be steep.

A common mistake is failing to allocate GST exemption intentionally at the time a trust is funded. Doing so later, or not at all, can create a partially or fully "GST-taxable" trust that complicates distributions for decades. Families exploring dynasty trusts or multigenerational planning structures, topics relevant at the levels discussed at wealth at $100 million and beyond, should ensure qualified estate counsel addresses GST exemption allocation explicitly.