If some or all of your estate bypasses your children and passes directly to your grandchildren, your estate may owe a separate levy called the generation-skipping transfer (GST) tax. The GST tax is imposed in addition to any federal estate tax and is pegged to the highest federal estate tax rate in effect at the time, making it a potentially very expensive surprise if you have not planned ahead.
You can trigger GST tax in more than one way. For example, you choose to leave an inheritance directly to a grandchild instead of to your child. It can also be unintentional, such as when you leave assets in trust for a child who dies before fully receiving them. The remaining trust assets then pass to your grandchild and can fall into GST territory. GST tax can also apply if you leave assets to someone who is not related to you and who is more than 37.5 years younger than you.
Why does this tax exist? Historically, wealthy families used “generation-skipping trusts” to provide income to children while preserving the principal for grandchildren and beyond, allowing assets to grow without estate tax at each generational step and avoiding repeated taxation. Congress created the GST tax to counter that strategy by taxing transfers that skip a generation as if each generation had received and paid tax on its inheritance. Today, substantial assets left directly to grandchildren (or other “skip persons”) may be subject to this additional tax without proper planning.
There is good news: everyone has a lifetime GST exemption. For 2026, the GST exemption is $15 million per individual, allowing a married couple to allocate up to $30 million to grandchildren and further descendants free of GST, if they plan properly to preserve both spouses’ exemptions. As with the estate tax exemption, failing to structure your plan can waste one spouse’s GST exemption and increase tax exposure for your family.
One common solution is an “ABC” trust design for married couples. At the first spouse’s death, the estate is effectively split in half. One half, “Trust A,” remains revocable for the survivor. The other half is divided between “Trust B,” which is funded up to the deceased spouse’s available GST exemption, and “Trust C,” which receives any amount above the exemption that would otherwise be subject to estate tax if it flowed straight to the survivor. When the surviving spouse dies, that spouse’s GST exemption is then applied to Trust A. This structure helps make full use of both spouses’ exemptions and can be tailored to support children during their lifetimes while preserving assets for grandchildren and later generations. Similar tax planning can be done under a will, but you would give up many of the administration and privacy benefits of a revocable living trust.
Because GST rules are technical and the stakes can be high, work with an experienced estate planning attorney to determine whether you should incorporate GST planning and how to allocate your exemptions. With the right trust terms and proper allocation of each spouse’s GST exemption, you can support children as intended, preserve wealth for future generations, and minimize or eliminate GST tax exposure.
If you would like to learn more, or set up a complimentary estate planning consultation with one of our Madison, Wisconsin estate planning attorneys, please contact us and we can schedule a time to meet.