If you’re planning to leave wealth to your grandchildren, there’s a tax you should understand first. The generation-skipping transfer tax (GSTT) can surprise families who try to pass assets down more than one generation.
Understanding how GSTT works
The GSTT applies when you transfer property to someone at least 37.5 years younger than you, often your grandchild. This tax exists to prevent people from avoiding estate taxes by skipping a generation. The IRS treats this as a taxable event, separate from estate or gift taxes. You may owe GSTT on direct gifts or transfers through trusts.
When GSTT applies to your plan
You face GSTT when your transfer exceeds the lifetime exemption, which matches the federal estate tax exemption. For 2025, that amount is expected to drop significantly from current levels. If your estate plan includes trusts or large gifts to grandchildren, you could trigger the tax. However, smart planning can help avoid or reduce it.
How to lower GSTT exposure
You can reduce exposure to GSTT through careful planning. Using your GSTT exemption for lifetime gifts or setting up certain trusts can protect assets. Dynasty trusts, for example, let you pass wealth across generations while using your exemption effectively. Another strategy is to use annual gift exclusions for smaller transfers that don’t count toward your exemption.
Even if your estate seems modest now, growth over time could make it subject to GSTT later. This tax can significantly cut into what your grandchildren receive. Understanding how it works now helps you create a plan that keeps more in your family’s hands.
