Every time wealth passes from one generation to the next, the federal estate tax can take up to 40%. If you leave $10 million to your children, they might pay $3–4 million in estate taxes. When your grandchildren inherit the remainder, it may be taxed again. By the time the third generation receives the wealth, the original inheritance has been decimated.
A generation-skipping trust (GST) is designed to solve exactly this problem — allowing wealth to benefit multiple generations while being taxed only once (or not at all, if the GST exemption is properly used). It's one of the most powerful estate planning tools available to high-net-worth families, and in 2026, it's more time-sensitive than ever due to looming exemption changes.
This guide explains how generation-skipping trusts work, the GST tax and its exemptions, who benefits most, and what you need to know to use this strategy effectively.
A generation-skipping trust (also called a dynasty trust, GST trust, or skip trust) is an irrevocable trust that holds assets for the benefit of multiple generations. The key feature: assets in the trust pass to grandchildren (or great-grandchildren) without being included in your children's taxable estates at death.
Here's the core idea:
The result: assets in the trust can compound and grow for decades, benefiting multiple generations, without being eroded by estate taxes at each generational transfer.
Congress didn't simply let families skip estate taxes without a response. In 1986, Congress enacted the generation-skipping transfer (GST) tax — a separate federal tax on transfers of wealth to "skip persons" (people more than one generation below the transferor).
A skip person is someone who is at least two generations younger than you, or an unrelated individual at least 37.5 years younger. This includes:
Your children are not skip persons — transfers to them are subject to estate or gift tax, not the GST tax.
The GST tax applies to three types of transfers:
The GST tax rate is a flat 40% — the same as the federal estate tax rate. This means a transfer subject to both estate tax and GST tax could face a combined effective rate near 64%.
The good news: Congress provided a substantial GST exemption — the same lifetime exemption as the estate and gift tax. In 2026, this is:
This means you can transfer up to $13.99 million to a generation-skipping trust (or directly to skip persons) without paying any GST tax. This exemption is separate from the annual gift tax exclusion ($18,000 per recipient per year in 2026, indexed for inflation).
⚠️ CRITICAL: The 2025 TCJA Sunset — The Tax Cuts and Jobs Act of 2017 doubled the estate, gift, and GST exemptions. These elevated exemptions are currently scheduled to sunset on January 1, 2026, reverting to approximately $7 million per person (inflation-adjusted). Congress may or may not extend them. If you have an estate over $7 million and haven't maximized your GST exemption, the window may be closing. Act now with the guidance of a qualified estate planning attorney.
The GST exemption doesn't automatically apply to your generation-skipping trust — it must be properly allocated to the trust. This allocation is typically made on a gift tax return (Form 709) when assets are transferred to the trust. If you don't allocate properly, transfers to the trust will be subject to GST tax.
Your estate planning attorney handles this allocation as part of setting up the trust. It's one of the reasons a GST trust requires qualified legal assistance — the tax mechanics are complex and errors are expensive.
A generation-skipping trust typically works as follows:
William, 70, has a $20 million estate. He leaves it to his daughter Sarah ($6.8M after estate taxes). Sarah grows this to $10M over her lifetime. When Sarah dies, her estate pays $1.2M in estate taxes, leaving $8.8M for her children. Two estate taxes — two rounds of erosion.
William transfers $13.99M into a GST trust (using his full exemption) and pays estate taxes only on the remaining $6.01M of his estate. The $13.99M grows tax-efficiently inside the trust for 40 years to $55M. Sarah receives income during her lifetime but doesn't "own" the trust assets. When Sarah dies, $55M passes to her children (William's grandchildren) with NO additional estate tax because the GST exemption was properly allocated. Two generations later, the family has vastly more wealth.
A dynasty trust is a generation-skipping trust designed to last for multiple generations — potentially indefinitely. The "rule against perpetuities" traditionally limited trusts to about 90 years (roughly three generations). But many states have now abolished or significantly relaxed this rule:
| State | Maximum Trust Duration | Key Advantage |
|---|---|---|
| South Dakota | Perpetual (no limit) | No state income tax on trust; strong creditor protection; privacy laws |
| Nevada | Perpetual (no limit) | No state income tax; strong DAPT laws; favorable trust laws |
| Delaware | Perpetual (no limit) | Sophisticated trust law; strong courts; favorable LLC laws |
| Alaska | Perpetual (no limit) | No state income tax; DAPT available; privacy |
| Wyoming | Perpetual (no limit) | No state income tax; strong asset protection; modern trust statute |
| Most other states | 90 years or less | Standard rule against perpetuities applies |
By establishing a dynasty trust in one of these favorable states — even if you don't live there — you can potentially create a multi-generational wealth vehicle that lasts for centuries, sheltering family wealth from estate taxes at each generation.
This is exactly what many of America's wealthiest families do. The ability to lock in $13.99 million (or $27.98 million for a couple) in a perpetual trust, properly allocated with GST exemption, creates a compounding machine that can grow to hundreds of millions over multiple generations — without repeated estate tax erosion.
Not all generation-skipping trusts look the same. Here are the most common variations:
A straightforward trust that skips your children entirely and goes directly to grandchildren — either as an outright gift or in a trust for their benefit. This is uncommon because most grantors want to provide for their children first, but it's the most literal form of "generation-skipping."
The most common structure: your children receive income during their lifetimes, but the trust principal passes to grandchildren at your children's death without being included in their estates. This allows you to provide for your children while preserving the core wealth for future generations.
Uses annual gift tax exclusions ($18,000 per recipient per year in 2026) to fund the trust, combined with GST exemption allocation. By making annual gifts that the beneficiary has a brief right to withdraw (satisfying IRS requirements for the annual exclusion), you fund the trust without touching your lifetime exemption. Over many years, this can build a substantial GST-exempt trust from annual gifts alone.
An IDGT is a trust that's treated as irrevocable for estate tax purposes (assets out of your estate) but treated as "yours" for income tax purposes — meaning you pay income taxes on trust earnings personally, which effectively makes additional tax-free gifts to the trust. Combining an IDGT with GST planning is a sophisticated strategy used by high-net-worth families with significant growth-asset portfolios.
A CLAT makes payments to charity for a specified period, after which the remainder passes to grandchildren (or a GST trust for their benefit). If structured correctly, the remainder can pass to skip persons with minimal or no gift or GST tax. This requires a highly qualified estate planning attorney and works best with particular types of assets.
Generation-skipping trusts are most beneficial for:
If your estate approaches or exceeds $13.99 million per person, estate planning to minimize the 40% estate tax is critical. A GST trust is one of the most powerful tools available because it can shelter a large amount from estate taxes not just for this generation but for future ones.
Even below the estate tax threshold, a GST trust provides asset protection for future generations (against creditors, lawsuits, and divorce), structured distributions that prevent squandering, and a family legacy vehicle that preserves wealth in a protected structure.
If you have assets that are expected to appreciate significantly — a business before a sale, real estate in a growing market, appreciated stock — transferring them into a GST trust now locks in the current value for exemption purposes. Future appreciation occurs inside the trust, out of your taxable estate.
Transferring minority interests in a family business to a GST trust before a sale or liquidity event can be particularly powerful. Minority interest discounts (for lack of control and marketability) can reduce the taxable value of the transfer, allowing more business value to enter the trust within the exemption limit.
Even without estate tax concerns, a GST trust provides an organized, protected, and potentially long-lasting vehicle to benefit your grandchildren — with trustee-controlled distributions that ensure the money is used wisely.
GST trusts are powerful but not for everyone. Key limitations:
A properly structured GST trust requires a specialized estate planning attorney — not an online document service. Expect to pay $5,000–$20,000+ in attorney fees for the trust creation, gift tax return preparation, and proper exemption allocation. Ongoing administration (annual accountings, tax filings, trustee services) adds to the cost.
Once you transfer assets to a GST trust, you generally cannot get them back. This loss of control and liquidity is a real concern. You should only transfer assets you're confident you won't need for your own financial security.
The trustee manages your family's wealth for potentially decades. Choosing the wrong trustee — someone who makes poor investment decisions, plays favorites among beneficiaries, or lacks the competence to handle complex administration — can undermine the entire purpose. Many GST trusts use institutional (corporate) trustees: bank trust departments or specialized trust companies.
If your estate is well below $7 million, the GST tax implications are minimal, and the cost of a specialized GST trust probably exceeds the benefit. A well-drafted revocable living trust with appropriate beneficiary protections is usually sufficient.
Tax laws change. The current high exemption amounts are scheduled to sunset in 2026. Future Congresses could further reduce exemptions, change GST rules, or modify trust laws. Long-range tax planning always carries some legislative risk.
This is non-negotiable for a GST trust. The tax mechanics are complex; the trust document must be precise; and the exemption allocation must be handled correctly on IRS Form 709. Mistakes are expensive and often irreversible. Find an attorney who specializes in estate planning and has specific experience with generation-skipping trusts.
Choose assets strategically. Growth assets (business interests, real estate, stocks with upside) are ideal because future appreciation occurs outside your estate. Minimize use of cash or low-yield assets unless there's a specific reason.
If you want a dynasty trust or the best creditor protection, consider establishing the trust in a favorable jurisdiction: South Dakota, Nevada, Delaware, or Wyoming. This requires a trustee with a physical presence in that state (a trust company or bank trust department located there).
For a multigenerational trust, a corporate trustee is usually the best choice — they provide continuity, professional investment management, and institutional accountability. Some families use co-trustees: a family member for guidance and a corporate trustee for administration. See our guide on choosing a trustee for detailed considerations.
How will children and grandchildren access trust assets? Common frameworks:
Work with your attorney to file the necessary gift tax return (Form 709) allocating your GST exemption to the trust. This step is critical — without proper allocation, the trust will be subject to GST tax on skip-person transfers.
Transfer identified assets into the trust. Ensure ongoing administrative compliance: annual tax filings, trustee accountings, and regular review with your attorney to ensure the trust continues to reflect your intentions and current law.
| Strategy | Estate Tax Benefit | GST Tax Benefit | Complexity | Best For |
|---|---|---|---|---|
| GST Trust | Assets out of estate | ✅ GST exemption shields transfers | High | Estates $7M+ with multigenerational goals |
| Direct bequest to grandchild | Uses estate exemption | ✅ GST exemption can apply | Low | Simple, smaller transfers |
| 529 College Savings Plan | Minimal estate benefit | ✅ 5-year gift tax averaging available | Low | Education funding for grandchildren |
| Annual exclusion gifts ($18k/yr) | Reduces estate gradually | ✅ Annual exclusion also applies to GST | Low | Ongoing annual giving |
| GRAT (Grantor Retained Annuity Trust) | Removes appreciation from estate | Depends on structure | High | Transferring growth assets with low risk |
If your estate is below the current exemption levels, a generation-skipping trust may not be your immediate priority — but estate planning still is. A well-crafted living trust with appropriate distribution provisions protects your beneficiaries and creates the foundation for more sophisticated planning as your wealth grows.
Start with a solid estate plan today. If your estate grows or the exemption threshold changes, you can layer in GST planning with your attorney's guidance.
Whether you need a basic living trust or are beginning to explore advanced GST planning, Trust & Will is the best starting point — affordable, state-compliant, and legally valid in all 50 states.
Start Your Trust with Trust & Will →Generation-skipping trusts are among the most powerful tools in the estate planner's arsenal — but they're also the most complex and only make sense for certain families. If your estate approaches or exceeds the federal estate tax exemption, or if you have meaningful assets you want to protect and pass to multiple generations, a GST trust deserves serious consideration.
The urgency is real in 2026: the elevated GST exemption ($13.99 million per person) may be cut nearly in half when TCJA provisions sunset. Families who can benefit from locking in the higher exemption should be in active conversations with their estate planning attorneys right now.
For everyone else — families with estates well below the exemption threshold — a well-crafted living trust with thoughtful beneficiary protections provides the foundation. As your wealth grows, you can revisit GST planning. But don't let the perfect be the enemy of the good: having a solid estate plan today is more important than having the perfect advanced plan someday.