By Lynn Evans
Estate planning and avoiding estate taxes are often primary concerns for families with significant wealth. One tax that rarely receives enough attention is the generation-skipping transfer tax (GSTT), which is imposed on transfers of assets from one person to those who are more than one generation younger. A common example is a grandparent who wishes to transfer their wealth (directly or indirectly) to a grandchild, thereby “skipping” their own children in the process.
Understanding this tax assessment is imperative for ultra-wealthy families, since the tax is a) assessed at the highest tax rates (40%), and b) is assessed in addition to gift or estate taxes. At Solidarity Wealth, our experience has shown that with careful strategic planning, this complex tax issue can often be avoided and potentially save millions in unnecessary tax liability for future generations.
Let’s take a closer look at the GSTT and its complexities.
What Is the GSTT?
Although federal estate taxes have been in the books since the early 1900s, the GSTT was Congress’s response in 1976 to strategies used by wealthy families to avoid the “double tax” on estate transfers (first to the next generation, then afterward to the grandchildren) by “skipping” the first generation entirely. Subject to an exemption value currently equal to the estate tax exemption ($13.99 million for each person or $27.98 million for a married couple in 2025; increased to $15 million and $30 million in 2026), the GSTT is assessed on transfers to a “skip person.”
A skip person is someone two or more generations younger than the transferor, and includes:
- Grandchildren, including great-grandchildren
- Other close relatives, such as great-nieces and nephews
- A beneficiary who isn’t related by blood, marriage, or adoption if they’re more than 37½ years younger than the person making the gift.
There are two types of “skip transfers” as well: direct and indirect.
- Direct skip: A direct skip is when the transferor gifts assets directly to a skip person (including a direct inheritance via Will or Revocable Trust), and the recipient has immediate ownership rights thereafter.
- Indirect skip: In an indirect skip, someone transfers money to a Trust that may eventually distribute assets to the skip person as the beneficiary. The important step for the transferor (grantor) is that they must allocate and report their use of the GSTT exemption on the transfer to the trust to make it effective. If they don’t and the money is later paid out to the skip person, that money may be taxed.
When someone makes a generation-skipping gift or bequest, the IRS adds the GSTT to the regular estate or gift tax, ensuring the federal government gets its cut from both generations.
Avoiding the GSTT
One of the simplest ways to avoid the GSTT is to initiate transfers below the exemption value well in advance, allocate the GSTT exemption to the transfer, and allow the value to grow for the benefit of the intended heirs thereafter. For example, a young grandfather may create a trust for the benefit of his grandchildren and, using his GSTT exemption in 2025, gift $13 million worth of assets to the trust. Thereafter, regardless of how large the asset value grows within the trust, the grandchildren and future generations will eventually benefit from those assets free from GSTT. So-called dynasty trusts are often created in this manner.
In another example, a married couple could create an irrevocable life insurance trust with their grandchildren as beneficiaries and, using just $2 million of their combined GSTT exemption, give enough to fund premiums on a second-to-die life insurance policy owned by the trust. At the second of their deaths and dissolution of the trust, the grandchildren would receive the estimated millions in death benefits from the policy, free from income, estate, or GSTT tax liability.
The Complexities of the GSTT
The generation-skipping transfer tax rules are complex. Here are some pitfalls to watch whenever considering making significant wealth transfers to future generations:
- No portability to a surviving spouse: Unlike the estate tax exemption, a surviving spouse cannot use a deceased spouse’s GSTT exemption.
- Automatic allocation of the GSTT: In certain situations, the GSTT exemption may be automatically allocated, so if not desired (e.g., the transfer will go to a non-skip person), the transferor must “opt out” of using it to avoid wasting the exemption.
- Reporting the gift to the IRS: Whether you intend to allocate GSTT to a gift or opt out of automatic allocation, it is important to report this on a timely-filed gift tax return. This not only makes your intention clear, but can also avoid some very sticky issues years down the road. You should always discuss large gifts with your tax advisor.
- Transfers to non-family persons: The age of a non-family recipient is important. Those heirs over 12½ years but less than 37½ years younger than the transferor are considered next-generation (non-skip). If over 37½ years, non-family heirs are considered skip persons and fall under the GSTT. In the former case, using the GSTT exemption would not be necessary, but in the latter, it would be.
In summary, assessing your exposure to and minimizing the potential GSTT should be approached with the guidance of a team of experienced professionals, including wealth managers, estate planning attorneys, and tax experts. Recent tax legislation made the GSTT exemption increase permanent, so understanding how this tax may affect you is critical to preserving your legacy and wealth preservation objectives.
Planning Your Legacy for Future Generations? Talk With Us First.
At Solidarity Wealth, we specialize in helping high-earning individuals and families build and pass on multi-generational wealth in the most tax-efficient manner, while maintaining the financial flexibility they need to capitalize on opportunities as they arise. If you’re looking for a tailored investment and estate planning strategy that aligns with your goals, we’d love to help.
Let’s have a conversation. Reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
About Lynn
Lynn Evans the Director of Family Office Services and a Tax Advisor at Solidarity Wealth, a privately held, independent wealth management firm that serves as a multi-family office to some of the Mountain West’s most successful families, technology entrepreneurs, and executives.
Lynn brings a wealth of experience to his role, advising families and individuals on complex individual, fiduciary, and business income tax matters, estate and gift tax planning, and fiduciary administration.
Prior to joining Solidarity Wealth, Lynn served as a Senior Trust Advisor at Wells Fargo Private Bank, where he helped successful clients identify their goals and worked closely with them to develop and implement comprehensive wealth strategies. Before his role at Wells Fargo, he worked as a senior tax manager for a large international CPA firm, specializing in complex tax issues for individuals, businesses, trusts, and estates.
Lynn holds a Bachelor of Arts in Accounting and a Master of Accountancy with an emphasis in tax from the University of Utah, as well as a Juris Doctor with a focus in Business Law and Estate Planning from Albany Law School. He is an active member of the Salt Lake Estate Planning Council and the American Bar Association, where he continues to engage with and contribute to the wealth management community. Outside of work, Lynn enjoys spending quality time with his wife and four children. A dedicated outdoorsman, he loves hiking, camping, and skiing, and is always eager to hone his home improvement skills or attend music performances and sporting events. To learn more about Lynn, connect with him on LinkedIn.
The strategies, examples, and insights discussed in this article are intended for informational purposes only and should not be construed as personalized investment, tax, or legal advice. Every individual’s financial situation is unique, and the appropriateness of any strategy will depend on your specific circumstances. Before making any financial decisions, including those involving equity compensation, charitable giving, or business sales, we strongly recommend consulting with your team of qualified tax, legal, and investment professionals.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
