# Generation-Skipping Trust (GST): Definition and How It's Taxed

![Generation-Skipping Trust (GST): A legally binding agreement in which assets are passed down to the grantor's grandchildren.](https://www.investopedia.com/thmb/IMOqHL-FumbDocn7H4q4SA7JuQg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Generation-skippingtrust_final-9dc3ad66082f40839818e03c9acf5ad5.png)

*— Investopedia / Michela Buttignol*

## What Is a Generation-Skipping Trust (GST)?

A generation-skipping trust (GST) is a type of legally binding trust agreement in which the contributed [assets](https://www.investopedia.com/terms/a/asset.asp) are passed down to the grantor's grandchildren. They "skip" the next generation, the grantor's children. The assets avoid [estate taxes](https://www.investopedia.com/terms/e/estatetax.asp) that would apply if the children directly inherited them because they're only taxed once.

Generation-skipping trusts can be effective wealth-preservation tools for individuals with significant assets and savings.

### 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)

A generation-skipping [trust](https://www.investopedia.com/terms/t/trust.asp) effectively transfers assets from the grantor's estate to their grandchildren. The [grantor](https://www.investopedia.com/terms/g/grantor.asp)'s children never take title to the assets. This allows the estate to avoid a generation of estate taxes that would apply if the assets came into the possession of the next generation first.

Grandchildren are the most common beneficiaries but the recipient of a generation-skipping transfer doesn't necessarily have to be a family member. The beneficiary can be anybody who is at least 37½ years younger than the grantor and not a spouse or an ex-spouse.

> **Important**
>
> Generation-skipping trusts can still provide some financial benefits to the next generation because the grantor can give children access to any income the trust's assets generate while still leaving the assets themselves in trust for their grandchildren.

## Taxing the Generation-Skipping Transfer Trust (GST)

The generation-skipping transfer tax was first instituted in 1976. Changes were made to the [tax code](https://www.investopedia.com/terms/t/tax-code.asp) in 1986 to create the current version due to the generation-skipping trust's viability as a loophole to avoid federal estate taxes. Generation-skipping transfer tax rates have risen and fallen over the years with a high of 55% in 2001 and 2011, and a low of 0% in 2010 due to a complete exemption awarded by the 2010 Tax Relief Act.

Exemptions are intended to ensure that people transferring modest sums of wealth to younger generations don't have to bear the brunt of the tax burden. They were secured by the [American Taxpayer Relief Act of 2012](https://www.investopedia.com/terms/a/american-taxpayer-relief-act-2012.asp). The legislation established a permanent exemption, starting at $5 million and adjusting for inflation each year, on generation-skipping transfers so the federal tax on a generation-skipping transfer of wealth would apply only if the amount exceeded $5 million.

The GSTT truly applies to the very wealthy, however, because the transferred amount is significant. Most people will never encounter the GSTT because of the high threshold. The tax only applies when the transferred amount exceeds $13.99 million per individual for single taxpayers and $27.98 million for married couples filing jointly as of 2025. The exemption is the gift and estate tax lifetime exemption.

## The GST Tax Exemption

GSTs still serve as tools for [high-net-worth individuals](https://www.investopedia.com/terms/h/hnwi.asp) to transfer wealth at a lower tax rate even with the installment of taxes on generation-skipping transfers. And they became even sharper tools on December 22, 2017 when President Donald Trump signed the [Tax Cuts and Jobs Act](https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/) into effect during his first term which doubled the generation-skipping tax exemption.

The Tax Cuts and Jobs Act (TCJA) doubled the estate tax exemption to $11.18 million for singles and $22.36 million for married couples beginning on January 1, 2018 but only through 2025. The exemption level is indexed for inflation, meaning these numbers have increased each year. The 40% top tax rate remains in place.

This act expires on January 1, 2026 pushing the exemptions back to their pre-Act amounts unless Congress extends them.

## What Are the Benefits of a Generation-Skipping Trust?

A generation-skipping trust reduces the amount of estate taxes when ultra-high net worth individuals ([UHNWIs](https://www.investopedia.com/terms/u/ultra-high-net-worth-individuals-uhnwi.asp)) pass down their wealth. Generation-skipping transfers go directly to grandchildren or great-grandchildren and are only taxed once instead of being taxed at each generation of inheritance,

## How Much Is the Generation-Skipping Transfer Tax?

Generation-skipping transfers are taxed at a flat 40% tax rate excluding the amounts covered by the generation-skipping transfer exemption.

## Can You Close a Generation-Skipping Trust?

A generation-skipping trust is usually [irrevocable](https://www.investopedia.com/terms/i/irrevocabletrust.asp). It can't be amended or dissolved after it's created. Irrevocable trusts can be dissolved through judicial action, however. This could happen if a judge determined that the trust was created fraudulently or that the grantor was not of sound mind at the time of its creation.

## The Bottom Line

A generation-skipping trust is a legal vehicle that allows wealthy individuals to reduce their tax burdens when they pass on their wealth. These trusts are taxed only once as they pass wealth on to grandchildren or other generation-skipping heirs instead of paying estate taxes with each generation. Estate taxes only affect fortunes in the tens of millions so a generation-skipping trust is generally only necessary for the truly wealthy.  

> **Article Sources**
>
> 1.  Bratton Law Group. "[Passing Assets to Grandchildren Through a Generation-Skipping Trust](https://www.brattonlawgroup.com/blog/passing-assets-to-grandchildren-through-a-generation-skipping-trust/)."
>     
> 2.  Journal of Accountancy. "[The Generation-Skipping Transfer Tax: A Quick Guide](https://www.journalofaccountancy.com/issues/2009/oct/20091804.html)."
>     
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>     
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>     
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>     
> 6.  Internal Revenue Service. "[Estate Tax](https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)."
>     
> 7.  Husch Blackwell. "[Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions](https://www.huschblackwell.com/newsandinsights/understanding-the-2026-changes-to-the-estate-gift-and-generation-skipping-tax-exemptions#:~:text=The%20Tax%20Cuts%20and%20Jobs,2017%20to%20%2411%2C180%2C000%20in%202018.)."
>     
> 8.  The White House. "[Remarks by President Trump at Signing of H.R. 1, Tax Cuts and Jobs Bill Act, and H.R. 1370](https://trumpwhitehouse.archives.gov/briefings-statements/remarks-president-trump-signing-h-r-1-tax-cuts-jobs-bill-act-h-r-1370/)."
>     
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