Estate Planning
What Is a Generation-Skipping Trust?
Diana is 58 years old. She owns five rental properties across Miami, has two adult children, and four grandchildren who call her Abuela every chance they get. She has spent the last two decades building her real estate portfolio, and she is proud of it. More than proud — she wants it to outlast her.
At her annual estate planning review, her attorney looks up from the documents and says, “Diana, given where your portfolio is heading, we should start talking about a generation-skipping trust.”
Diana nods. She has heard the term before — vaguely, at a seminar years ago. But if she is being honest, she has no idea what it actually means or whether it applies to her. She knows it has something to do with grandchildren and taxes. Beyond that? Blank.
If that sounds familiar, this article is for you. Here is what a generation-skipping trust actually is, how it works, and — most importantly — whether it makes sense for your situation.
The short answer: a generation-skipping trust is a legal arrangement that lets you pass assets directly to grandchildren (or anyone two or more generations below you) while significantly reducing the estate tax that would otherwise be applied twice — once when you die, and again when your children die and pass those assets to your grandchildren.
Why Generation-Skipping Trusts Exist: The Double-Tax Problem
To understand why a GST trust matters, you first need to understand the problem it solves.
Under the current U.S. estate tax system, when you die and leave assets to your children, your estate may owe federal estate taxes (depending on the total value). That is the first hit. Then, when your children eventually die and leave those same assets to their children — your grandchildren — the estate gets taxed again. Same assets, second tax bill.
Congress recognized this was a particularly painful outcome for families building multi-generational wealth, so they created the generation-skipping transfer (GST) tax — and with it, a set of tools (including the generation-skipping trust) designed to address the double-tax problem. When structured correctly, a GST trust lets assets pass from you directly to your grandchildren, skipping the middle generation's taxable estate entirely and triggering only one round of estate taxation.
In plain terms: instead of your estate being taxed, then your child's estate being taxed, the assets move cleanly from you to your grandchildren — with only one pass through the tax system. The middle layer is skipped.
What Is a “Skip Person”?
The IRS uses the term skip person to describe the beneficiary who is at least two generations below you in the family tree — typically a grandchild. It can also refer to an unrelated individual who is more than 37.5 years younger than you.
There are three types of generation-skipping transfers, and understanding them helps make the mechanics clearer:
Direct skip. You transfer assets directly to a skip person — for example, you leave money or property straight to your grandchildren in your will or trust, bypassing your children entirely. This triggers the GST tax (unless covered by your exemption).
Taxable distribution. The trust distributes income or principal to a skip person. The grandchild receives funds from the trust, and if the distribution exceeds what is covered by exemption, GST tax may apply.
Taxable termination. The interest of a non-skip person (like your child) in the trust ends — typically because they die — and what remains passes to a skip person (your grandchild). Again, this can trigger GST tax if not sheltered by the exemption.
The key takeaway: the generation-skipping trust is the legal structure used to hold assets and make these transfers in a way that is planned, coordinated, and — ideally — fully covered by your available GST exemption.
The GST Exemption: Your Built-In Protection
Here is the good news: most people with meaningful assets will never owe GST tax at all — because of the generation-skipping transfer exemption.
For 2024, the federal GST exemption is $13.61 million per person. That means you can transfer up to $13.61 million to skip persons — directly or through a trust — without triggering any GST tax. Married couples can combine their exemptions for up to $27.22 million in total coverage. This is called portability — the surviving spouse can elect to use the deceased spouse's unused exemption.
If your estate exceeds the exemption threshold, the GST tax rate is currently 40% — the same as the top federal estate tax rate. That is a significant hit, which is exactly why thoughtful planning matters.
One important note: the current high exemption amounts are scheduled to sunset in 2026 and drop back to approximately $7 million (inflation-adjusted) unless Congress acts. This means the window to lock in the higher exemption through proper trust structuring is open now — but not indefinitely.
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Get Trust & Estate Administration 101 — $37 →Who Is a Generation-Skipping Trust Actually For?
A GST trust is not a one-size-fits-all tool. It is most valuable in specific situations:
Large estates approaching or exceeding the exemption. If your total estate — including real estate, investment accounts, business interests, and retirement assets — is approaching $7–$13 million, a GST trust is worth serious consideration now, before the exemption sunset.
Multi-generational wealth transfer. If your goal is for your wealth to benefit not just your children but your grandchildren and beyond, a GST trust is specifically designed to accomplish that across generations.
Real estate investors. Like Diana, real estate investors often hold appreciating assets that will be significantly more valuable at death than they are today. Planning now — while values and tax exposure are lower — creates flexibility that is hard to replicate later.
Business owners. A business that grows substantially in value over the next decade could push an estate well past the exemption threshold. Getting GST provisions in place early locks in today's lower valuations.
Families with special-needs grandchildren. A GST trust can be drafted with special provisions for a grandchild with a disability, ensuring they receive support without disqualifying them from government benefits like Medicaid or SSI. This is one of the most compassionate uses of the structure.
Dynasty Trusts: The Long Game
If you want to think even longer-term than grandchildren, there is a concept called a dynasty trust. Think of it as a generation-skipping trust with no expiration date.
Historically, trusts in most states had to terminate eventually under what is known as the “rule against perpetuities.” But more than half of U.S. states — including South Dakota, Nevada, Delaware, and Alaska — have eliminated or significantly extended that limit, allowing trusts to run for centuries or even indefinitely.
A dynasty trust funded with your GST exemption can potentially shield those assets from estate taxation across multiple generations — great-grandchildren, great-great-grandchildren, and beyond. The assets grow inside the trust, are distributed according to the trust terms, and never become part of any beneficiary's taxable estate.
Dynasty trusts are a longer conversation for estates with significant assets and a clear multi-generational vision. But it is worth knowing they exist — because a well-drafted GST trust today can be structured to become a dynasty trust if your estate or your goals evolve.
GST Trust vs. Direct Gifts to Grandchildren
You might be wondering: can't I just give money to my grandchildren directly? Why go through the complexity of a trust?
You can — and for smaller amounts, direct gifts are often the simpler choice. You can give up to $18,000 per person per year (the 2024 annual gift tax exclusion) completely tax-free. For grandchildren, that adds up meaningfully over time. But direct gifts have real limitations:
No control after the gift. Once you hand over the money, it is theirs. A 22-year-old grandchild can spend it however they choose — on education, on a car, or on something you never intended. A GST trust lets you define how and when distributions happen.
No protection from creditors. A direct gift becomes part of the beneficiary's personal assets, which means creditors, divorcing spouses, or lawsuits can reach it. Assets held in a trust with a spendthrift clause are generally protected.
Limited to the annual exclusion for tax-free transfers. If you want to transfer a property worth $800,000 to your grandchildren, a direct gift triggers gift tax exposure. A properly structured GST trust funded with your exemption does not.
The rule of thumb: direct annual gifts work well for routine, modest transfers. A GST trust is the right tool when you are moving significant assets — real estate, investment portfolios, business interests — and want to do it with structure, protection, and multi-generational intent.
Back to Diana
Diana's attorney pulls up her current portfolio. Five properties, total current value around $4.2 million. Between her investment accounts and retirement assets, her total estate sits around $6.1 million. Still well below the $13.61 million federal exemption.
“You're not at the threshold today,” her attorney explains. “But your real estate has been appreciating at 8 to 10 percent a year. If that continues for another decade, you could be looking at a $12 to $14 million estate — right at the edge of where GST planning becomes critical.”
And then there is the sunset. If the exemption drops back to roughly $7 million in 2026 as scheduled, Diana's estate could exceed it sooner than she thinks.
The attorney's recommendation: set up a revocable living trust now — with GST provisions built in. This gives Diana flexibility (she can update it as her life changes) while establishing the architecture for generation-skipping transfers. If and when her estate grows past the threshold, the structure is already in place. No scrambling. No costly last-minute decisions.
Diana leaves the meeting with a clearer head. She is not scrambling to fund a complex irrevocable trust today. She is building a foundation — one that grows with her estate and protects her grandchildren from a tax hit she now understands and can plan around.
I'm not an attorney. I'm a CTFA (Certified Trust and Financial Advisor) sharing foundational knowledge to help you start the conversation with your estate planning attorney. This article is educational, not legal advice. Estate tax laws, GST exemption amounts, and trust rules vary by state and are subject to change — for guidance specific to your situation, consult a licensed estate planning attorney.
Frequently Asked Questions About Generation-Skipping Trusts
Does a generation-skipping trust avoid all taxes?
Not entirely. A GST trust minimizes or eliminates the generation-skipping transfer tax on transfers to grandchildren and beyond — but assets in the trust may still generate income that is subject to income tax, and the initial funding of the trust may involve gift or estate tax depending on how it is structured. The goal is to prevent the double layer of estate tax, not to eliminate all taxes entirely.
Can I change a generation-skipping trust after it is set up?
It depends on the type. If the GST provisions are built into a revocable living trust — as Diana's attorney recommended — you can update or revoke the trust while you are alive. However, if assets are moved into an irrevocable GST trust (often done to lock in the current high exemption), those terms generally cannot be changed. Your attorney can explain which structure fits your flexibility needs.
Does a generation-skipping trust affect my children?
It can — and this is worth a direct conversation with your family. A GST trust can be structured so your children still receive income or even principal distributions during their lifetimes. What it prevents is your children's estate from being taxed on those same assets a second time when they pass the wealth to your grandchildren. Your children are not cut out; the middle layer of taxation is.
What is the difference between a generation-skipping trust and a bypass trust?
Both are estate planning tools designed to reduce estate taxes, but they work differently. A bypass trust (also called a credit shelter trust) is typically used by married couples to shelter assets from estate tax at the surviving spouse's death — it uses the deceased spouse's estate tax exemption. A generation-skipping trust goes further — it is specifically designed to shield assets from tax across two or more generations. Many estate plans for wealthy families use both in combination.
Do I need a special attorney to set up a GST trust?
You need an estate planning attorney who has experience with generation-skipping trusts specifically — this is not a general practice document. The trust must comply with IRS requirements to qualify for the GST exemption, the trustee must be properly designated, and the transfer tax planning must be coordinated with your broader estate plan. Ask any attorney you interview whether they have drafted GST trusts and how many they have handled. This is a specialized area of estate law.
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This article is for educational purposes only and does not constitute legal or financial advice. Boricua Legacy Publishing Company is an educational publisher. For guidance specific to your situation, consult a licensed estate planning attorney in your state.
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