GST Tax Basics
GST tax applies a 40% tax on transfers from a transferor to a 'skip person.' Skip persons include: grandchildren (and younger descendants), unrelated individuals more than 37.5 years younger than the transferor, and trusts where all beneficiaries are skip persons.
Three taxable events: direct skips (transfers directly to skip persons), taxable terminations (when a non-skip-person interest terminates leaving only skip persons), taxable distributions (distributions from trusts to skip persons).
GST exemption 2026: $13.9 million per person, indexed annually for inflation. Same as the estate tax exemption (federally unified). A married couple combined: $27.8 million of GST exemption.
How GST and estate tax interact: GST is IN ADDITION TO estate tax. A direct skip is subject to both estate tax (40% above $13.9M) AND GST (40%). Effective combined rate: up to 64% (estate tax on the gift, GST on the post-estate-tax amount). This is why direct skips above the exemption are so punitive.
Strategic implication: ultra-high-net-worth families with $50M+ that they want to benefit grandchildren and beyond face this combined tax. Without GST planning, the family loses 64% of the wealth above the exemption to taxes.
Direct Skips and Annual Exclusion
Direct skips include: gifts directly to grandchildren, gifts to trusts where all beneficiaries are skip persons, beneficiary designations naming grandchildren on retirement accounts/life insurance.
Annual gift exclusion ($19,000 in 2026 per donor per recipient, $38,000 if married) does NOT use GST exemption when given directly to skip persons. So you can gift up to $19K to each grandchild annually without using your GST exemption.
Strategic use: a married couple with 6 grandchildren can give $228,000 per year ($19K × 2 × 6) directly to grandchildren without using estate or GST exemption. Across 20 years: $4.56 million transferred GST-free. Plus appreciation in the grandchildren's hands.
Direct payment of medical and educational expenses: payments DIRECTLY to medical providers or educational institutions on behalf of grandchildren are NOT subject to gift or GST tax — unlimited amounts. Pay grandkids' tuition or medical bills directly to the school/provider, no tax implications.
Strategic implication: ultra-wealthy families can pay all grandchildren's education and healthcare directly, transferring substantial sums without using exemptions. Combined with annual exclusion gifts, even modest planning can move millions of dollars to grandchildren tax-free.
GST Trusts: Multi-Generational Structures
GST-exempt trusts are designed to use the donor's GST exemption to provide multi-generational benefits without re-incurring transfer tax at each generation.
Structure: irrevocable trust funded with up to $13.9M (using GST exemption). Trust benefits multiple generations — children for life, then grandchildren for life, then great-grandchildren. As long as the trust was properly funded with GST exemption, distributions and benefits to skip persons throughout the trust's life don't trigger additional GST tax.
Dynasty trusts: long-term GST-exempt trusts (some states allow perpetual duration) that potentially benefit family members for centuries. The original $13.9M GST exemption funds a trust that can grow tax-free across generations and benefit descendants without triggering estate or GST tax at any generational transition.
Concrete example: $13.9M placed in a dynasty trust today. Grows at 7% real return for 100 years: roughly $11 BILLION. All available to descendants without any further estate or GST tax. Compare to inheriting $13.9M, paying estate tax at each generation: after 4 generations of 40% estate tax, only $13.9M × 0.6^4 = $1.8M would remain in the family — vs $11B in the dynasty trust.
Where dynasty trusts are most effective: states with no rule against perpetuities (or very extended rules) — Delaware, South Dakota, Alaska, Nevada, Wyoming, and others. These states allow trusts that can theoretically last forever.
Trustee selection: dynasty trusts often use corporate trustees (banks, trust companies) plus trust protectors who can modify the trust if circumstances change dramatically. The structure should be flexible enough to adapt to changing tax laws and family needs.
Allocating GST Exemption
GST exemption allocation requires careful timing and planning. By default, gifts to direct skip persons (e.g., directly to grandchildren) automatically use GST exemption. Gifts to non-skip persons (children) don't use GST exemption by default — but may need to in some cases.
Indirect skips: gifts to trusts that have skip person beneficiaries but aren't pure GST trusts (e.g., trusts benefiting both children and grandchildren) require explicit GST allocation to avoid future GST issues.
Form 709: gift tax returns must be filed annually if you make taxable gifts. The form includes GST exemption allocation. Failure to allocate properly can mean GST exemption isn't applied where intended.
ETIP rule: gifts to certain trusts where the donor retains an interest don't allow GST exemption allocation until the donor's retained interest ends. Plan around this — premature allocation may not work as intended.
Late allocation: if you forgot to allocate GST exemption in a prior year, late allocation can sometimes be made through revoking and re-issuing exemption allocations on subsequent gift tax returns. Limited but valuable in certain situations.
GST in Estate Planning
At death, your remaining GST exemption can be allocated to bequests in your will or trusts. Most states' default rules apply automatically, but explicit specification in estate planning documents avoids ambiguity.
GST allocation order: typically goes to grandchildren-skipping bequests first to ensure those are GST-exempt. Children's bequests don't need GST exemption (they're non-skip persons).
Surviving spouse considerations: GST exemption can be allocated to QTIP trusts (qualified terminable interest property) that benefit a surviving spouse. The reverse QTIP election allows the deceased spouse's GST exemption to be used even though the trust property isn't currently a skip transfer.
Portability: estate tax exemption portability between spouses doesn't extend to GST exemption. Each spouse's GST exemption is 'use it or lose it' at death — you can't transfer unused GST exemption to the surviving spouse.
Strategic implication for couples: each spouse should ideally use their own GST exemption during life through trust funding rather than relying on it being available at death.
Sunset Risk and Planning Urgency
GST exemption (currently $13.9M) is unified with estate tax exemption. The doubled exemption from TCJA was scheduled to revert after 2025 to approximately $7M. Recent legislation extended the doubled exemption through 2026.
If exemption decreases: the IRS issued anti-clawback regulations confirming that exemption used at current high levels won't be clawed back if the exemption decreases later. So gifts made now using $13.9M of exemption are 'locked in' even if the exemption drops to $7M afterward.
Planning urgency: estates between $7M and $14M face a 'use it or lose it' decision. Fund GST trusts now to lock in the higher exemption, or risk losing exemption if it decreases.
Concrete strategy: married couple with $20M of net worth. Considering a 2026 gift of $14M to a GST-exempt dynasty trust. They use roughly half of their combined $27.8M exemption. If exemption drops to $7M each ($14M combined) after 2026, they've already used what would be the full new exemption. Future appreciation in the trust escapes both estate AND GST tax permanently.
Compare to delay: same couple waits until 2027 when exemption is $7M each. They can only gift $14M total before triggering tax. The same gift but with substantially less wealth permanently shielded.