Why GST planning matters

Generation-skipping transfer (GST) planning is a targeted estate-tax strategy families use when they want assets to benefit grandchildren, great-grandchildren, or other “skip persons” while minimizing the extra layer of federal taxation that can apply when property effectively “skips” a generation. Without planning, transfers that bypass a child and go directly to a grandchild may trigger the federal GST tax in addition to normal estate or gift taxes, reducing the value of the inheritance.

The goals of GST planning are typically to:

  • Preserve wealth across multiple generations.
  • Avoid or reduce the GST tax and minimize overall estate and gift taxes.
  • Provide creditor protection and spendthrift protections for beneficiaries.
  • Control timing and conditions for distributions (education, health, milestones).

For authoritative guidance see the IRS page on the generation-skipping transfer tax (IRS: Generation-Skipping Transfer Tax) which explains tax treatment, exemptions, and filing requirements (https://www.irs.gov/businesses/small-businesses-self-employed/generation-skipping-transfer-tax).

Key concepts explained

  • Skip person: any individual two or more generations below the transferor (commonly grandchildren) or unrelated individuals 37 1/2 years or more younger than the transferor.
  • Direct skip: an outright gift or bequest to a skip person that is a taxable transfer for GST purposes.
  • Indirect skip: a transfer to a trust where skip persons may receive distributions (for example, a trust that benefits children and later grandchildren).
  • GST exemption: a lifetime exclusion that shelters transfers from the GST tax. The exemption is adjusted annually for inflation and equals the federal estate and gift tax exclusion amount. Always confirm the current figure on the IRS site.
  • Taxable distribution/termination: technical GST events that can trigger tax when a trust pays or terminates interests in skip persons.

Understanding these terms helps you work with advisors to match a technique to your goals.

Common GST planning techniques

1) Dynasty (generation-skipping) trusts

A dynasty trust is a long-term trust designed to last for multiple generations (to the extent state law permits). Funding a dynasty trust with an allocation of your GST exemption shelters future distributions to skip persons from the GST tax. Dynasty trusts also commonly include creditor protection, spendthrift clauses, and directed trustee provisions. (See our glossary entry on Dynasty Trusts for structure and use: https://finhelp.io/glossary/dynasty-trust/.)

2) Direct skip gifts with GST exemption allocation

You can make direct gifts to grandchildren and allocate your GST exemption to those gifts to avoid GST tax. Some gifts may qualify for automatic allocation; however, the interaction between automatic allocation rules and your intent can be complex. Many advisors proactively file elections (Form 709) to allocate GST exemption where appropriate.

3) Irrevocable trust funded with annual exclusion gifts (Crummey powers)

Using a Crummey trust structure lets you make gifts that qualify for the annual gift tax exclusion by giving beneficiaries (or their parent as custodian) a temporary withdrawal right. Allocating GST exemption to these gifts can shelter future distributions from GST tax while preserving use of your lifetime exemptions. See our entry on Crummey Trusts for more details: https://finhelp.io/glossary/crummey-trust/.

4) Spousal trusts and inter-spousal planning

Some married couples use spousal lifetime access trusts (SLATs) or marital/credit shelter planning to coordinate estate, gift, and GST strategies across two estates. Those approaches can preserve access for a surviving spouse while allocating GST exemption efficiently.

5) Lifetime gifts vs. testamentary transfers

Gifting during life can remove assets from your taxable estate and benefit from the GST exemption if properly allocated. However, lifetime gifting may cause the recipient to inherit a carryover basis (no step‑up), which can increase capital gains tax on later sale. Testamentary transfers using trusts at death can secure a step‑up in basis at the decedent’s death but require careful GST exemption allocation and tax return filing.

Practical considerations and tradeoffs

  • GST exemption is limited and indexed. Because the GST exemption is tied to the federal estate and gift tax exclusion and is adjusted annually, you should confirm the current amount with the IRS before making allocations.
  • Basis consequences. Skipping a generation may mean beneficiaries do not receive a step‑up in income-tax basis that an immediate heir would have received at the intermediate generation’s death. This can raise capital‑gains exposure for the ultimate recipients.
  • State law variation. Some states limit trust duration (rule against perpetuities), have separate estate or inheritance taxes, or define skip persons differently. Coordinate federal GST planning with state-law counsel.
  • Administrative complexity and costs. Long-term trusts require trustees, ongoing administration, and tax return filing (Form 706‑GS(T) in some cases or Form 709 for gift reporting). These costs must be balanced against tax savings.
  • Allocation and elections. GST exemption can be allocated automatically in some cases, but filing a timely Form 709 and electing allocation is often advisable to lock in the protection.

Common mistakes to avoid

  • Failing to allocate GST exemption intentionally. Relying on automatic allocation without documenting intent can produce unintended tax results.
  • Overlooking basis effects when making lifetime gifts to skip persons.
  • Not updating trust language to reflect law changes or life events (births, deaths, marriages, divorces).
  • Ignoring state tax and trust-duration rules.
  • Funding a trust with inappropriate assets (illiquid business interests, retirement accounts without careful planning) that create tax or administrative burdens.

Example (simplified, hypothetical)

A grandparent wants to leave $2 million to a trust for grandchildren. The grandparent allocates GST exemption to the trust when funded and structures the trust as a dynasty trust. If the allocation is timely and sufficient, distributions to grandchildren can avoid GST tax; the trust’s assets can continue to grow for future generations with creditor protection. This example is illustrative only; exact tax results depend on exemption amounts, the allocation, and tax rules at the time of transfer.

Action checklist for families considering GST planning

  1. Inventory assets and identify who you want to benefit (children, grandchildren, charities).
  2. Estimate your projected estate and gift-tax exposure and whether GST planning adds value.
  3. Decide whether lifetime gifts or testamentary transfers better achieve your goals (consider basis impacts).
  4. Work with an estate attorney and tax advisor to draft trust documents (dynasty, Crummey, QTIP, etc.). See general trust basics here: https://finhelp.io/glossary/trust-2/.
  5. Determine GST exemption allocation strategy and prepare required tax filings (Form 709 for gifts; consult counsel for GST return requirements).
  6. Review the plan annually or after major life events and when tax law changes occur.

Frequently asked questions

Q: Who benefits most from GST planning?
A: Families with multi-generational wealth, business owners who want to preserve company control across generations, and those seeking creditor protection for descendants often benefit most.

Q: Is GST planning only about taxes?
A: No. GST planning also addresses control, protection from creditors and divorcing spouses, and the timing and purpose of distributions (education, health, entrepreneurship).

Q: Do I need to file special tax forms?
A: Gift transfers that use GST exemption typically require Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return). Larger or complex transfers can trigger additional filing and reporting; a tax lawyer or CPA should confirm requirements.

When to involve professionals

GST planning sits at the intersection of tax law, trust law, family governance, and financial planning. In my practice, multi-disciplinary coordination—estate attorney, tax CPA, and a trust-focused financial planner—produced the best outcomes, especially for business owners or clients with complex assets. Because the rules are technical and change over time, professional guidance is essential.

Sources and further reading

Professional disclaimer: This article is educational and does not constitute legal, tax, or investment advice. GST rules are technical and frequently change. Consult a qualified estate attorney or tax advisor to design an approach tailored to your facts and current law.