The generation-skipping transfer tax is a flat 40 percent federal tax on wealth that moves to a grandchild, great-grandchild, or other recipient at least two generations below the person making the transfer. It sits on top of the regular gift and estate taxes, so a transfer to a grandchild can face both layers. For 2026, each person has a $15 million lifetime exemption that can shield transfers from the GST tax before any is owed.1Internal Revenue Service. What’s New – Estate and Gift Tax
Who Counts as a Skip Person
The whole system turns on whether the recipient is a “skip person,” meaning someone assigned to a generation two or more levels below the transferor. Within a family, grandchildren and great-grandchildren are skip persons; children are not.2Office of the Law Revision Counsel. 26 U.S. Code 2613 – Skip Person and Non-Skip Person Defined A trust can also be a skip person if every beneficiary with an interest in it is a skip person, or if no one holds an interest and distributions can only go to skip persons.
For unrelated recipients, the IRS uses birth dates. Someone born more than 37½ years after you is two or more generations below you and counts as a skip person. Someone born 12½ to 37½ years after you is one generation below.3Office of the Law Revision Counsel. 26 USC 2651 – Generation Assignment
The Predeceased Parent Exception
If your child dies before a transfer takes place, that child’s children move up one generational level for that transfer and are no longer skip persons. The rule also covers the descendants of a deceased child of your spouse or former spouse.4Office of the Law Revision Counsel. 26 USC 2651 – Generation Assignment – Section: Special Rule for Persons With a Deceased Parent The exception exists so a family that has already lost a middle-generation member does not face a tax penalty on transfers that would have passed through that person.
Three Transfers That Trigger the Tax
Federal law recognizes exactly three events that can trigger the GST tax. Which one occurred decides who owes the tax and which return gets filed.
Direct Skips
A direct skip is a gift or bequest that goes straight to a skip person: a check written to a grandchild, property left to a great-grandchild in a will, or a trust funded solely for skip persons. Direct skips are also subject to the regular gift or estate tax at the same time, so both taxes can apply if exemptions have been used up.5Office of the Law Revision Counsel. 26 USC 2612 – Taxable Termination; Taxable Distribution; Direct Skip
Taxable Terminations
A taxable termination happens when an interest in a trust ends and only skip persons remain as beneficiaries. The classic pattern: a trust pays income to your daughter for life, then everything passes to your grandchildren at her death. When her interest terminates and no non-skip person holds an interest anymore, the GST tax applies to the trust assets.5Office of the Law Revision Counsel. 26 USC 2612 – Taxable Termination; Taxable Distribution; Direct Skip
Taxable Distributions
A taxable distribution is a payment of income or principal from a trust to a skip person while non-skip persons still hold interests. If a trustee sends $100,000 from a family trust to a grandchild while your child is still receiving income from that same trust, the payment is a taxable distribution. Each separate payment is its own taxable event.5Office of the Law Revision Counsel. 26 USC 2612 – Taxable Termination; Taxable Distribution; Direct Skip
The $15 Million Lifetime Exemption
Every individual has a lifetime GST exemption that can be applied to transfers to shield them from the tax. The amount tracks the basic exclusion used for estate and gift taxes. Following the One, Big, Beautiful Bill Act, it stands at $15 million per person for 2026, and a married couple can jointly shelter up to $30 million by each using their own.1Internal Revenue Service. What’s New – Estate and Gift Tax
You can allocate exemption to lifetime gifts, to assets passing through your estate at death, or split it across both. Once exemption attaches to a transfer or trust, the property is protected going forward, and any future appreciation is shielded along with it.6Office of the Law Revision Counsel. 26 U.S. Code 2631 – GST Exemption That is why allocating early to assets expected to grow can be so effective: the cost in exemption locks in at the transfer value while the protection covers whatever those assets become decades later.
A trap catches many couples. Unlike the estate and gift tax exemption, the GST exemption is not portable between spouses. If one spouse dies without using their $15 million, the survivor cannot inherit the unused amount. It simply disappears.7Congress.gov. The Generation-Skipping Transfer Tax (GSTT) Couples who want to maximize protection for grandchildren and later generations usually plan around this by having each spouse fund separate trusts during life.
Small Gifts That Escape the Tax Entirely
Some transfers to skip persons avoid the GST tax without using any lifetime exemption. For 2026, you can give up to $19,000 per recipient per year as a nontaxable gift, and the GST rules treat those gifts as having an inclusion ratio of zero, meaning fully exempt.8Internal Revenue Service. Gifts and Inheritances Payments made directly to a school for tuition or to a medical provider for someone’s care are excluded from both gift tax and GST tax, with no dollar limit.
Gifts made through a trust face an extra hurdle. To qualify for the zero inclusion ratio, the trust must benefit only one person during their lifetime, no one else can receive distributions from it, and if the trust does not terminate before the beneficiary dies, its assets must be includable in that beneficiary’s estate.9Office of the Law Revision Counsel. 26 USC 2642 – Inclusion Ratio – Section: Treatment of Certain Direct Skips Which Are Nontaxable Gifts Direct gifts to a grandchild that stay within the annual exclusion don’t have to meet those conditions.
Automatic Allocation of Your Exemption
The IRS does not wait for you to allocate your exemption. By default, it attaches automatically to every direct skip you make during life, using up whatever amount is needed to reach an inclusion ratio of zero. The same automatic rule applies to indirect skips, which are transfers to trusts that could eventually benefit skip persons.10Office of the Law Revision Counsel. 26 USC 2632 – Allocation of GST Exemption
Automatic allocation helps when you want the coverage but wastes exemption when you don’t. If a transfer goes into a trust that will never benefit skip persons, the default rules can burn exemption where it provides no benefit. To prevent that, you elect out on a timely filed Form 709 by describing the transfer and stating that you do not want the automatic allocation to apply.11eCFR. 26 CFR 26.2632-1 – Allocation of GST Exemption Once the filing deadline passes for the year of the transfer, the allocation (or the election against it) becomes irrevocable.
How the Tax Is Calculated
When a transfer exceeds available exemption, the rate is the maximum federal estate tax rate (currently 40 percent) multiplied by the inclusion ratio for the transfer.12Office of the Law Revision Counsel. 26 U.S. Code 2641 – Applicable Rate Full exemption coverage produces an inclusion ratio of zero and no tax. No allocation at all produces an inclusion ratio of one and the full 40 percent rate.
The inclusion ratio equals one minus the “applicable fraction,” which is the GST exemption allocated to the transfer divided by the value of the property transferred, adjusted for estate taxes recovered from the trust and any charitable deductions.13eCFR. 26 CFR 26.2642-1 – Inclusion Ratio Allocate $3 million of exemption to a $10 million trust and the applicable fraction is 0.30, the inclusion ratio is 0.70, and the effective rate on future taxable events is 28 percent. Partial allocation like this leaves you with a partly exempt trust that complicates administration for decades, which is why most planners aim to make a trust either fully exempt or fully non-exempt from the start.
Who Pays and What to File
The type of event decides who is on the hook. For a direct skip that is not made from a trust, the transferor pays. For a direct skip from a trust, the trustee pays from trust assets. Taxable terminations fall on the trustee, who pays from the trust before distributing what remains. Taxable distributions land on the recipient, and if the trustee pays the tax out of trust assets on the recipient’s behalf, that payment is itself treated as an additional taxable distribution.14Office of the Law Revision Counsel. 26 USC 2603 – Liability for Tax That tax-on-tax feedback makes taxable distributions the most expensive event of the three.
Reporting follows the transfer. Lifetime direct skips go on Form 709, the same return used for regular gifts and for allocating exemption or electing out of automatic allocation.15Internal Revenue Service. Instructions for Form 709 A direct skip at death is reported by the executor on Schedule R of Form 706. Taxable distributions are reported by the recipient on Form 706-GS(D) by April 15 of the year after the distribution.16Internal Revenue Service. Instructions for Form 706-GS(D) Taxable terminations are reported by the trustee on Form 706-GS(T), also due April 15 of the year following the event.17Internal Revenue Service. Instructions for Form 706-GS(T) – Generation-Skipping Transfer Tax Return for Terminations A weekend or holiday shifts the due date to the next business day, and Form 7004 filed before the original due date secures an automatic extension. Late filing or underpayment triggers penalties and daily-compounding interest.