What Is the GST Exemption and How Does It Work?

The GST exemption is the lifetime amount you can transfer to grandchildren, more remote descendants, or other beneficiaries at least two generations below you without triggering the federal generation-skipping transfer tax. For 2026, that amount is $15 million per person, or $30 million for a married couple who each use their full exemption.¹ The tax exists because, without it, wealthy families could skip a full round of estate tax by handing assets directly to grandchildren. Anything you transfer above your available exemption is taxed at 40%, and the decisions you make about how to allocate the exemption across gifts and trusts cannot be undone.

What Counts as a Generation-Skipping Transfer

The tax only applies when property moves to a “skip person.” Within a family, that means someone two or more generations below you: a grandchild, great-grandchild, and so on. For non-relatives, the generation is set by age. Anyone born more than 37½ years after you is treated as being in the second generation below, with a new generation assigned every 25 years after that.² A trust is itself a skip person if every beneficiary with an interest in it is a skip person.

Three kinds of transfers can pull the tax in:

Direct skips. An outright transfer to a skip person, either during life or at death. The tax hits immediately, based on the value transferred.
Taxable terminations. An interest in a trust ends and only skip persons are left as beneficiaries. This is common in family trusts where a child holds the initial interest and grandchildren take the remainder.
Taxable distributions. Any income or principal paid from a trust to a skip person that isn’t already a direct skip or a taxable termination.

The 2026 Exemption Amount and Rate

Your GST exemption is tied to the basic exclusion amount under the estate tax. The One Big Beautiful Bill Act, signed into law on July 4, 2025, set the base exclusion at $15 million per person and eliminated the sunset that had been scheduled under the Tax Cuts and Jobs Act. Beginning in 2027, the $15 million figure is adjusted annually for inflation.¹

Because the GST exemption tracks the estate and gift tax exemption dollar for dollar,³ the same $15 million ceiling covers the transfers you make during life and at death combined. Any amount above your available exemption is taxed at the maximum federal estate tax rate, 40%.⁴ That flat rate applies when no exemption has been allocated to the transfer; partial allocations produce a blended result through the inclusion ratio.

How to Allocate Your Exemption

Allocating GST exemption means assigning a specific dollar amount of your $15 million to a particular transfer or trust. Once made, the allocation is irrevocable.³ Allocate too little to a trust that later grows, and the appreciation faces the 40% rate. Allocate too much to a trust that underperforms, and you’ve spent exemption that could have protected other transfers.

Automatic Allocation

The tax code automatically allocates your unused exemption to direct skips made during your lifetime, up to the fair market value of the property at the time of transfer, and it does the same for indirect skips involving trusts that could eventually benefit skip persons.⁵ At death, whatever exemption you haven’t used is allocated first to direct skips at death, then to trusts from which future taxable distributions or terminations might occur. You can override the automatic rule by reporting the transfer on a timely filed Form 709 and electing out, which is worth doing when you’d rather save exemption for a trust with more growth potential.

Manual Allocation and the Leverage of Early Timing

Estate planners often allocate exemption manually to trusts holding assets they expect to appreciate. If you fund a trust with $2 million in stock and allocate $2 million of exemption when you make the transfer, then the stock grows to $20 million, the entire $20 million is shielded. Getting the initial valuation right is what makes this work. For non-cash assets such as real estate, closely held business interests, or artwork, the IRS generally expects either a qualified appraisal or a detailed description of the valuation method, reported on Form 709.⁶

The Inclusion Ratio and Why It Matters

The inclusion ratio is the number that determines how much GST tax a trust will actually owe on future distributions and terminations. Start with the applicable fraction: exemption allocated to the trust divided by the value of the property at the time of the transfer. The inclusion ratio equals one minus that fraction, rounded to the nearest thousandth.⁷

In practice, there are two outcomes worth aiming for. A ratio of zero means the trust is fully exempt from GST tax on everything it ever distributes, no matter how much the assets grow. A ratio of one means no exemption was allocated and the full 40% rate applies to future generation-skipping events. Anything in between leaves you with a partially exempt trust that has to be tracked for decades. Because the ratio locks in at allocation and stays with the trust for its entire life, planners almost always aim for zero or accept one rather than splitting the difference.

Transfers That Don’t Use Up Your Exemption

Not every gift to a grandchild spends your $15 million. Gifts that qualify for the annual gift tax exclusion, which is $19,000 per recipient for 2026, are also excluded from GST tax when made as direct skips outside a trust.¹ A married couple can combine their exclusions to give $38,000 per grandchild each year without touching either spouse’s GST exemption. Direct payments to an educational institution for tuition or to a medical provider for someone’s care are also excluded from both gift tax and GST tax, with no dollar cap.

Trusts face stricter rules. For a gift to a trust to qualify for the GST annual exclusion, the trust must benefit only one individual, no one else can receive income or principal during that person’s life, and the trust assets must be includible in the beneficiary’s estate if the trust doesn’t terminate before they die.⁸ That effectively limits the exclusion to single-beneficiary trusts.

Two Traps Married Couples Miss

The GST Exemption Is Not Portable

The estate and gift tax exemption is portable between spouses: when the first spouse dies, the survivor can elect to use whatever portion the deceased spouse didn’t use. The GST exemption does not work that way. A deceased spouse’s unused GST exemption vanishes unless it was allocated to trusts or transfers before or at death.⁹ Couples who assume all exemptions carry over and defer planning until the second death can lose half their generation-skipping capacity.

One tool that helps is the reverse QTIP election, which lets the executor of the first spouse to die treat that spouse as still being the transferor of a marital-deduction trust for GST purposes. That preserves the deceased spouse’s exemption for use against the trust.¹⁰ The election must cover all property in the QTIP trust and is irrevocable, so it belongs in a plan drafted with counsel before the first death.

The Predeceased Parent Rule

A grandchild normally counts as a skip person. But if the grandchild’s parent, meaning your child, has already died at the time of the transfer, the grandchild moves up a generation for GST purposes and is no longer a skip person.² Transfers to that grandchild don’t trigger GST tax and don’t need any exemption allocated to them. The rule covers your lineal descendants and those of your spouse or former spouse. It doesn’t apply to non-relatives, whose generation is fixed by age regardless of who has died in between.

How to Report GST Transfers

Lifetime transfers that trigger the tax or allocate exemption are reported on Form 709, the United States Gift and Generation-Skipping Transfer Tax Return. Transfers at death are reported on Form 706, filed by the estate’s executor.⁶ File Form 709 even when the gift owes no tax because it’s fully covered by exemption. Without a filed return, the IRS has no record of how you’ve used your exemption, and that gap can turn into an expensive problem later.

Form 709 is due by April 15 of the year after the gift. An automatic extension of your income tax return on Form 4868 also extends your gift tax return, or you can file Form 8892 for a six-month extension of the gift tax return alone. Neither extends the time to pay any tax owed.⁶

If you owe GST tax and file late, the penalty is 5% of the unpaid tax for each month the return is overdue, capped at 25%.¹¹ When the transfer is fully covered by exemption and no tax is due, the percentage penalty produces no dollar amount, but filing still starts the statute of limitations on the gift and creates the record of your allocation you’ll want years later.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 U.S. Code 2651 – Generation Assignment
3
Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
4
Office of the Law Revision Counsel. 26 U.S. Code 2641 – Applicable Rate
5
Office of the Law Revision Counsel. 26 USC 2632 – Special Rules for Allocation of GST Exemption
6
Internal Revenue Service. Instructions for Form 709 (2025)
7
eCFR. 26 CFR 26.2642-1 – Inclusion Ratio
8
Office of the Law Revision Counsel. 26 U.S. Code 2642 – Inclusion Ratio
9
Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
10
eCFR. 26 CFR 26.2652-2 – Special Election for Qualified Terminable Interest Property
11
Internal Revenue Service. Failure to File Penalty