Generation-Skipping Transfer Tax

The generation-skipping transfer tax is imposed by Chapter 13 of the Internal Revenue Code, whose operative sentence is a single line. Section 2601: "A tax is hereby imposed on every generation-skipping transfer (within the meaning of subchapter B)." The reason it exists is structural. The estate tax is designed to reach wealth once a generation. A transfer that vests property in grandchildren, or in a long-lived trust for their benefit, bypasses the children's estates entirely, so without a separate tax the same wealth could pass through a century of family ownership having been taxed once instead of three or four times. Chapter 13 charges a tax at the point of the skip that approximates the estate tax the intervening generation never paid.

The important thing to be clear about at the outset is scale. Because section 2631(c) sets the exemption by reference to the estate and gift exclusion, this tax reaches roughly the same very small share of families that the estate tax does. It is not a general trap on leaving money to grandchildren, and a page that presents it that way alarms readers who will never encounter it.

Who is a skip person. Section 2613(a) gives two answers. A natural person is a skip person if they are "assigned to a generation which is 2 or more generations below the generation assignment of the transferor." A trust is a skip person only on strict terms: "if all interests in such trust are held by skip persons," or if there is no person holding an interest in it and no distribution may ever be made from it to a non-skip person. Everyone else is a non-skip person under section 2613(b). That trust test matters more than it looks, because it is where intuition fails: a trust whose beneficiaries include the grandchildren is not a skip person if a child also holds an interest in it. Retaining an interest for a non-skip person defeats the classification.

A note on spelling rather than substance: the Code writes it both ways in adjacent provisions, "non-skip person" in section 2613(b) and "nonskip person" in section 2613(a)(2)(B)(ii). Neither is the official form.

How generations are assigned, which is not always by age. Section 2651(b) assigns a lineal descendant of one of the transferor's grandparents by counting generations from that grandparent, and section 2651(b)(3) treats adoption and half-blood relationships as blood relationships of the whole blood. Two further rules are worth knowing because they surprise people in opposite directions. Section 2651(c)(1) provides that "an individual who has been married at any time to the transferor shall be assigned to the transferor's generation," so a much younger spouse is never a skip person. And section 2651(d) assigns a person who is not a relative by date of birth: someone born not more than 12½ years after the transferor is in the transferor's own generation, someone born more than 12½ but not more than 37½ years after is one generation below, and the statute then applies "similar rules for a new generation every 25 years." So a gift to an unrelated friend born more than 37½ years after the donor is a generation-skipping transfer. Skipping is not only about descendants.

The predeceased-parent rule, which removes the commonest fear. The statutory heading is "Special rule for persons with a deceased parent" — the phrase "predeceased ancestor exception" is practitioner shorthand for the same provision. Section 2651(e) provides that where a descendant's own parent, who is a lineal descendant of the transferor's parent, is dead at the time the transfer is subject to gift or estate tax, that descendant moves up a generation. The statute puts it as one generation below "the lower of the transferor's generation or the generation assignment of the youngest living ancestor" of that descendant, which in the ordinary case of a grandchild whose parent has died means one generation below the transferor rather than two. A grandchild who inherits because their parent died first is therefore not a skip person, which means that the case most often described as the archetypal generation skip is usually outside the tax altogether. Section 2651(e)(2) limits the rule for collateral heirs: it does not apply to someone who is not a lineal descendant of the transferor or their spouse if the transferor has any living lineal descendant.

Two categories of transfer are excluded outright. Section 2611(b)(1) removes any transfer that, if made during life, "would not be treated as a taxable gift by reason of section 2503(e)" — the qualified transfers for tuition paid directly to an educational organization and medical care paid directly to the provider. So paying a grandchild's tuition straight to the university is outside this tax entirely, not merely sheltered by exemption. Section 2611(b)(2) is an anti-double-tax rule for property already taxed under Chapter 13 where the second transferee is at the same or a lower generation and the transfers "do not have the effect of avoiding tax under this chapter."

The exemption is the same number as the estate and gift exclusion, and a different allowance. Section 2631(c) is one sentence: "the GST exemption amount for any calendar year shall be equal to the basic exclusion amount under section 2010(c) for such calendar year." The Internal Revenue Bulletin confirms the figure for 2026 and adds that it is "adjusted for inflation for taxable years beginning after December 31, 2026." But sameness of amount is not sameness of allowance. Section 2631(a) grants it to "every individual" for the purpose of determining the inclusion ratio, and section 2631(b) is blunt about the consequence: "Any allocation under subsection (a), once made, shall be irrevocable." Using estate and gift exclusion does not use GST exemption, and allocating GST exemption to the wrong trust cannot be undone.

There is no portability here. A surviving spouse may claim a deceased spouse's unused estate and gift exclusion under section 2010(c)(4), and Chapter 13 contains no equivalent. Unused GST exemption dies with the transferor, which is a real planning consequence of a first death and one of the few places where the two systems come apart despite sharing a number.

What OBBBA did, and how to state it without getting it backwards. Measured provision by provision, the One Big Beautiful Bill Act of 2025 amended no part of Chapter 13. It raised the section 2010(c) basic exclusion amount and repealed the scheduled reduction that would have roughly halved it after 2025. Because section 2631(c) tracks section 2010(c), the GST exemption rose and its scheduled halving disappeared without a word of Chapter 13 changing. The correct sentence is that the exemption moved because it is defined by cross-reference; "OBBBA amended the generation-skipping transfer tax" is wrong. Any source still describing the exemption as scheduled to be cut in half after 2025 is describing repealed law.

There are three kinds of generation-skipping transfer, and the Code lists them in this order. Section 2611(a): the term "means— (1) a taxable distribution, (2) a taxable termination, and (3) a direct skip." They are genuinely different events and they are reported on different forms, so a reader who cannot tell them apart cannot tell which return to file.

1. Taxable distribution — section 2612(b) defines it as "any distribution from a trust to a skip person (other than a taxable termination or a direct skip)." A trust that has been running for years makes a distribution to a grandchild. Reported on Form 706-GS(D), "Generation-Skipping Transfer Tax Return for Distributions."
2. Taxable termination — section 2612(a)(1) defines it as the termination "by death, lapse of time, release of power, or otherwise" of an interest in property held in trust, unless immediately afterwards a non-skip person has an interest in that property, or no distribution may ever be made from the trust to a skip person. The typical case is the death of the child who held the income interest, leaving the grandchildren as the only beneficiaries. Reported on Form 706-GS(T), "Generation-Skipping Transfer Tax Return for Terminations."
3. Direct skip — section 2612(c)(1) defines it as "a transfer subject to a tax imposed by chapter 11 or 12 of an interest in property to a skip person," which is to say a transfer that is already within the estate tax or the gift tax and goes straight to a skip person. A lifetime direct skip goes on Form 709; a direct skip at death goes on Form 706.

Note the consequence for the middle two: Form 709 covers only lifetime direct skips, so the other two kinds of transfer never appear on it even though its title mentions the tax.

The rate is a product, and reducing it to "40 percent" hides the entire point of the tax. Section 2641(a) defines the "applicable rate" as "the product of— (1) the maximum Federal estate tax rate, and (2) the inclusion ratio with respect to the transfer." Section 2641(b) fixes the first factor as the maximum rate under section 2001 at the time of the transfer, which tops out at 40 percent. That 40 percent is a fixed statutory rate and is not adjusted for inflation. The second factor is what does the work. Section 2642(a) defines the inclusion ratio as 1 minus the applicable fraction, whose numerator is the GST exemption allocated and whose denominator is broadly the value of the property transferred. A trust to which exemption was fully allocated has an applicable fraction of 1, an inclusion ratio of 0, and an applicable rate of 0 percent — permanently, for every future distribution and termination, no matter how much the trust grows or how many generations it serves. That is the mechanism behind a long-term dynasty trust, and it is invisible to anyone told the rate is 40 percent.

A hypothetical showing the arithmetic. Suppose Marguerite funds a trust for her descendants with $4,000,000 and allocates $3,000,000 of GST exemption to it. The applicable fraction is $3,000,000 divided by $4,000,000, or 0.75. The inclusion ratio is 1 minus 0.75, which is 0.25. The applicable rate is therefore 40 percent multiplied by 0.25, which is 10 percent. Twenty years later the trustee distributes $500,000 to a grandchild. That is a taxable distribution, and the GST tax is 10 percent of $500,000, or $50,000 — not $200,000, which is what a flat 40 percent would have produced.

Now change one input. Had Marguerite allocated the full $4,000,000 of exemption at funding, the applicable fraction would be 1, the inclusion ratio 0, and the applicable rate 0 percent, so the same $500,000 distribution would carry no GST tax. The trust could also have grown to $20,000,000 in the interim and the answer would be unchanged, because the ratio is fixed by the numbers at funding rather than recalculated later. The value of allocating exemption early to an asset expected to appreciate follows directly from that, and so does the cost of allocating it to a trust that turns out not to need it, since section 2631(b) makes the allocation irrevocable.

What the structure allows

• A trust funded with a full exemption allocation has an inclusion ratio of zero, so it can serve several generations without any further transfer tax on the property inside it.
• The exemption is per individual, so a married couple has two of them to allocate.
• Allocating exemption to an asset early, before it appreciates, shelters all of the later growth, because the inclusion ratio is fixed at funding rather than recomputed.
• Tuition and medical payments made directly to the provider are outside the tax altogether under section 2611(b)(1), with no dollar limit and no exemption used.
• A grandchild inheriting in place of a parent who died first is generally not a skip person at all, so the ordinary tragic case carries no skip tax.

The costs and the traps

• It is a third tax rather than a substitute, so a single lifetime transfer can consume gift exclusion and GST exemption and still be reportable.
• An allocation is irrevocable under section 2631(b). Exemption allocated to the wrong trust is simply gone.
• There is no portability of unused GST exemption between spouses, unlike the estate and gift exclusion, so it can be wasted at a first death.
• Automatic allocation rules mean exemption can be used without anyone deciding to use it, which is why electing out is itself a considered choice made on a filed return.
• A trust is a skip person only under strict tests, so an arrangement that feels like a skip may not be one, and one that does not feel like a skip may be.
• Whether a state imposes its own tax on these transfers is a separate question from the federal one.