GST Exemption
GST Exemption is the federal lifetime exemption from the Generation-Skipping Transfer (GST) tax — a tax imposed on transfers to grandchildren or unrelated persons more than 37.5 years younger. The 2026 exemption is $15 million per person, made permanent by the 2025 One Big Beautiful Bill Act with no scheduled sunset.
The GST tax was created to prevent wealthy families from avoiding estate tax across generations by transferring wealth directly to grandchildren rather than children. Without the GST tax, wealth could 'skip' a generation and thereby avoid one round of estate tax. The GST tax imposes the equivalent of an additional layer of estate tax on those skip transfers.
GST exemption is allocated by the donor — either automatically (default for most transfers) or by election. For irrevocable trusts intended to span multiple generations (dynasty trusts), allocation of GST exemption is critical: a properly GST-exempt trust can grow across generations without ever incurring estate or GST tax. A trust that fails to receive proper GST allocation incurs GST tax on distributions to grandchildren and beyond.
The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, set the GST exemption at $15M per person for 2026 (indexed thereafter) and made it permanent — the prior-law sunset to roughly $7M has been repealed. Even with a permanent high exemption, GST allocation remains critical for HNW families: a dynasty trust that fails to receive proper GST allocation incurs 40% GST tax on skip distributions, so estate-planning practices continue to prioritize getting the allocation right at funding.
Synthetic UHNW households with multi-generational beneficiary trees should track GST exemption usage separately from federal estate exemption — they're distinct pools. Dynasty-trust scenarios should include GST-allocated and GST-non-allocated trusts to exercise both code paths. Note: unlike federal estate exemption, GST is NOT portable between spouses (no GST-DSUE).
Common pitfalls
- Conflating GST exemption with federal estate exemption — they're separate pools with separate allocation rules.
- Assuming GST is portable like estate exemption — it isn't; portability under §2010(c)(5) does NOT extend to GST.
- Failing to allocate GST exemption to dynasty trusts at funding — automatic allocation defaults sometimes miss; the §2632(c) election is critical.
- Treating GST-non-exempt trust distributions as estate-tax-free — distributions to skip persons trigger GST tax on top of any other transfer tax.
Examples
Grantor funds a $15M dynasty trust in 2026 for the benefit of children, grandchildren, and great-grandchildren. Files Form 709 allocating $15M of GST exemption to the trust. Trust grows to $50M over 50 years; distributions to grandchildren and great-grandchildren are GST-tax-free for the entire amount because the trust is GST-exempt. Without proper allocation: distributions to skip persons would owe 40% GST tax = $20M+ in transfer tax across the generations.