The generation-skipping transfer tax is a flat 40% US federal tax on transfers that skip a generation — to a grandchild, or to anyone unrelated more than 37½ years younger — charged on top of any gift or estate tax, with a $15 million lifetime exemption per person in 2026.
In plain terms
It is a toll booth on every generation a fortune tries to drive past. Left alone, a family could leave property in trust for a child for life and then to a grandchild, paying estate tax once instead of twice. Congress closed that by taxing wealth that lands more than one generation down. The exemption is large enough that the tax is almost never paid — what matters is how the exemption gets allocated, because allocating it well is what makes a dynasty trust work.
How it works
Three events trigger the tax under Section 2612: a direct skip (a gift or bequest straight to a grandchild), a taxable termination (a trust interest for the middle generation ends and the trust continues for skip persons), and a taxable distribution (a trust pays out to a skip person). Who counts as a skip person is settled by the generation-assignment rules of Section 2651 — family members by lineage, everyone else by age, with the line drawn at more than 37½ years younger than the transferor.
The rate is not a bracket. It is the maximum federal estate tax rate multiplied by the trust’s inclusion ratio, a number between zero and one that measures how much of the trust is unprotected by exemption. Allocate exemption to the full value of a transfer and the inclusion ratio is zero; the tax rate on that trust is zero, permanently, no matter how large it grows. Allocate none and the ratio is one, and the full 40% applies at every skip.
Exemption is claimed on Form 709 during life or on Schedule R of the estate tax return at death, and some allocations happen automatically unless the transferor elects out. Two structural details separate it from the estate tax exemption: the GST exemption is not portable between spouses, and a predeceased-ancestor rule moves a grandchild up a generation if their parent died first, taking the transfer outside the tax entirely.
The numbers
- Rate, 2026: 40% flat — the top estate tax rate, times the inclusion ratio.
- Exemption, 2026: $15,000,000 per person, per the IRS 2026 inflation adjustments; up from $13,990,000 in 2025.
- Married couple, 2026: $30,000,000 combined — but only if each spouse uses their own. Unused GST exemption dies with the person.
- Skip threshold for non-relatives: more than 37½ years younger than the transferor.
- Stacking: the GST tax is charged in addition to gift or estate tax on the same transfer, not instead of it.
- Inclusion ratio of zero: the planning target — it exempts all future growth, not just the amount funded.
What people get wrong
That the GST exemption behaves like the estate tax exemption, and that a surviving spouse inherits whatever the first spouse did not use. Portability does not extend to it: a couple who runs everything through one spouse’s returns can quietly lose $15 million of the other’s, permanently. The second misread is about timing. Because exemption is allocated against the value going in, not the value coming out, a $15 million allocation to a trust holding early-stage stock protects that trust forever — even if it grows to $400 million. The exemption is not a cap on what reaches grandchildren tax-free; it is a cap on what goes in, which is why the machinery clusters around funding trusts early, cheaply, and in states that let them run for centuries.
Related
Read more: Generational Wealth: How Long Fortunes Actually Last · Inheritance: The Transfer of Wealth Between Generations · Trusts: How Wealth Is Held, Protected, and Passed On
See also: Dynasty trust · Estate tax exemption · Annual gift tax exclusion · Irrevocable trust