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 $13.99 million per person, scheduled to drop to roughly $7M after the TCJA sunset in 2026.
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 TCJA-doubled exemption is scheduled to sunset after 2025 unless Congress extends it. For HNW families with potential GST tax exposure, this creates 'use-it-or-lose-it' planning urgency through 2025 — additional gifting and trust funding before the sunset captures the higher exemption permanently. Many estate-planning practices have prioritized GST allocation work specifically because of this sunset.
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 $13.99M dynasty trust in 2026 for the benefit of children, grandchildren, and great-grandchildren. Files Form 709 allocating $13.99M 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.