Generation-Skipping Transfer Tax (GST Tax) Explained for New York Families

The GST tax is a flat 40% federal tax that lands on top of the estate or gift tax when wealth passes to grandchildren or anyone else two or more generations down. This page explains who it hits, when, and how the $15,000,000 exemption keeps it at zero.

Most New York families who ask us about leaving money to grandchildren have never heard of the generation-skipping transfer tax. It only matters once a family has enough wealth to think past its children, and it sits quietly behind the estate and gift tax until a gift or a bequest skips a generation. When it does apply, it is brutal: a flat 40%, charged in addition to any estate or gift tax already due on the same dollars.

The good news is that every person has a $15,000,000 GST exemption in 2026, and with correct planning the tax is almost always avoidable. The bad news is that the exemption does not take care of itself. It has to be allocated, on the right form, at the right time, to the right trust. We see more mistakes with the GST tax than with any other part of transfer tax planning, and most of them are paperwork mistakes. This page walks through the mechanics so you can see where the traps are.

What the GST Tax Is and Why It Exists

The federal transfer tax system is designed to take a bite at each generation. A parent pays estate tax when assets pass to a child; the child pays estate tax again when the same assets pass to a grandchild. Before the GST tax existed, wealthy families sidestepped the second bite by leaving property directly to grandchildren, or in trusts that passed to grandchildren without ever being taxed in the child’s estate.

Congress closed that gap with the generation-skipping transfer tax. Its purpose is to collect roughly what the estate tax would have collected at the skipped generation, and it does so bluntly: a flat tax at the top estate tax rate, 40% in 2026, on any transfer that skips a generation. The tax is imposed in addition to gift or estate tax on the same transfer, not instead of it.

Who Is a “Skip Person”

The GST tax applies to transfers to a “skip person” (IRC § 2651):

• Family members two or more generations below you. Grandchildren, great-grandchildren and their descendants are skip persons. Children, nieces and nephews are not. A grandchild’s spouse is assigned to the grandchild’s generation and is also a skip person.
• Unrelated people more than 37.5 years younger than you. Outside the family, generations are measured by age. A friend’s child, a young employee or a much younger unrelated partner can be a skip person without anyone realizing it.
• A trust whose beneficiaries are all skip persons. A trust solely for grandchildren is itself a skip person, and a gift to it is a direct skip.

The predeceased-parent exception. If your child has died before the transfer, that child’s children move up a generation and are treated as your children for GST purposes. A gift or bequest to them is not a generation-skipping transfer at all.

The Three Taxable Events

The Code identifies three kinds of generation-skipping transfers (IRC §§ 2611–2613).

1. Direct skip

An outright transfer to a skip person, during life or at death. Example: A Brooklyn grandmother writes a $100,000 check to her grandson toward an apartment. Unless GST exemption covers it, the gift is subject to GST tax on top of the gift tax rules. The donor reports it and pays.

2. Taxable termination

A trust interest ends and only skip persons are left. Example: A father leaves assets in trust for his daughter for life, remainder to her children. When the daughter dies, her interest terminates and the grandchildren are the only beneficiaries. The trustee pays the GST tax out of the trust.

3. Taxable distribution

A trust with both skip and non-skip beneficiaries distributes to a skip person. Example: A trust for a mother’s children and grandchildren pays a granddaughter’s graduate tuition from principal. The granddaughter, as recipient, is liable for the GST tax on what she received.

Direct skips are reported by the donor on Form 709 or Form 706. Terminations and distributions are reported by the trustee and the beneficiary, sometimes decades after the trust was created. That gap is why GST planning has to be right at the start. Our page on how a generation-skipping trust works covers the trust side in more detail.

The $15,000,000 GST Exemption and the Inclusion Ratio

Every individual has a GST exemption of $15,000,000 in 2026 (IRC § 2631), the same amount as the federal estate and gift tax exclusion, indexed for inflation after 2026 with no scheduled sunset. A married couple has $30,000,000 between them.

The exemption works through a fraction called the inclusion ratio (IRC § 2642). Allocating exemption equal to the full value of a transfer produces an inclusion ratio of zero: the trust is fully exempt, and no GST tax applies to any termination or distribution, no matter how large the trust grows. Allocating nothing produces a ratio of one, and every generation-skipping transfer from the trust is taxed at the full 40%. Allocating half produces a ratio of one-half and a tax at half the rate.

The goal in nearly every plan is an inclusion ratio of exactly zero. A “mostly exempt” trust carries a partial tax and a filing obligation on every distribution to a grandchild for the rest of its life. We keep exempt and non-exempt assets in separate trusts rather than let one trust carry a fractional ratio.

The GST exemption is not portable between spouses. Federal portability lets a surviving spouse pick up the deceased spouse’s unused estate and gift exclusion on a timely Form 706, but the election does not carry over the GST exemption. If a spouse dies without using it, it is gone. The fix is to fund a trust at the first death, often a credit shelter trust, and allocate the deceased spouse’s exemption to it on the estate tax return. See our portability page.

Automatic Allocation and Why You Should Never Rely On It

Congress created automatic allocation rules (IRC § 2632) for people who never think about the GST tax. Exemption is automatically allocated to lifetime direct skips and to lifetime transfers to a “GST trust” as defined in the statute; at death, unused exemption is allocated to direct skips and then to trusts that could later have a taxable termination or distribution.

In practice, automatic allocation is as likely to hurt as to help. The statutory definition of a GST trust is a series of exceptions to exceptions, and we regularly see two opposite errors:

• Exemption wasted on the wrong trust. A gift to a trust for a child that will be distributed to the child during life draws automatic allocation anyway, using up exemption that should have been saved for a true generation-skipping trust.
• Exemption never allocated to the right trust. A trust intended for grandchildren falls outside the statutory definition, nobody files a Form 709 to allocate, and the error surfaces twenty years later at a taxable termination.

The solution is simple. Every gift to a trust should be reported on Form 709, and the return should either affirmatively allocate GST exemption or affirmatively elect out of automatic allocation. The return is due April 15 of the year after the gift, extended to October 15 with an income tax extension, and adequate disclosure starts the three-year statute of limitations on the gift’s value. Filing is cheap insurance.

The Annual Exclusion and Direct-Skip Gifts

Outright gifts to a grandchild within the annual exclusion ($19,000 per donee in 2026, or $38,000 for a married couple that elects gift-splitting) are free of both gift tax and GST tax, as are direct tuition and medical payments under IRC § 2503(e).

Gifts to a trust for a grandchild are different. Even if Crummey withdrawal powers qualify the gift for the gift tax annual exclusion, it qualifies for the GST annual exclusion only if the trust meets IRC § 2642(c): a single beneficiary, no distributions to anyone else during that beneficiary’s life, and inclusion in that beneficiary’s estate if he or she dies before the trust ends. A typical Crummey trust with several grandchildren as beneficiaries does not meet these conditions, so annual exclusion gifts to it are gift-tax-free but still consume GST exemption or, if none is allocated, create a non-exempt share.

New York Has No GST Tax, But the New York Estate Tax Still Matters

New York repealed its state generation-skipping transfer tax effective 2014; only the federal GST tax applies to New York residents. New York also has no gift tax, although taxable gifts made within three years of death are added back to the New York gross estate (Tax Law § 954(a)(3)).

That does not make New York irrelevant. New York imposes its own estate tax at each generation, with a basic exclusion of only $7,350,000 in 2026 and a cliff at $7,717,500 above which the entire estate is taxed. A child who inherits outright, adds the inheritance to his or her own estate, and later dies a New York resident faces New York estate tax on the whole amount at rates that climb to 16%. If the parent instead leaves the assets in a properly drafted, GST-exempt trust for the child, those assets are not in the child’s New York gross estate. Skipping the federal estate tax at the child’s generation also skips the New York estate tax at that generation. We explain the vehicle on our GST trust page and our generation-skipping trust attorney page.

Worked Example: A $3,000,000 Gift to Grandchildren

Suppose a Manhattan grandmother gives $3,000,000 to a trust for her three grandchildren in 2026. Compare two versions of the same gift.

In the first column the grandmother has paid $1,200,000 in GST tax, and the GST tax paid on a direct skip is itself treated as an additional gift. If her gift exclusion were already used, gift tax at 40% would apply as well. In the second column, one line on Form 709 produces an inclusion ratio of zero, and the trust can grow to any size and pass to the grandchildren and their children with no GST tax ever. The gift tax treatment is identical in both columns; the only difference is the allocation. Because exemption is measured against value at the time of allocation, all future growth inside the trust stays exempt while only $3,000,000 of exemption was used.

Common Mistakes We See

• Assuming the estate tax exemption covers it. The gift and estate exclusion and the GST exemption are two separate $15,000,000 amounts. Covering a gift with one does nothing about the other.
• Never filing Form 709 for trust gifts. No return means no affirmative allocation, no election out, and a statute of limitations that never starts.
• Letting the first spouse’s GST exemption die with them. A plan that leaves everything outright to the surviving spouse can waste up to $15,000,000 of non-portable exemption.
• Mixing exempt and non-exempt assets in one trust. A fractional inclusion ratio taxes every distribution for the life of the trust. Use separate trusts.
• Forgetting unrelated younger beneficiaries. Gifts to unrelated people more than 37.5 years younger are skips even though no family generation is skipped.
• Ignoring New York at the child’s generation. An outright inheritance can push a child over New York’s $7,717,500 cliff. A GST-exempt trust keeps it out of the child’s New York estate entirely.

The GST tax matters for New York families with wealth approaching the federal exclusion, and for any family funding trusts for grandchildren or making large gifts to much younger unrelated people. For families comfortably below the New York exclusion who expect to leave everything to children, it is not a practical concern; annual exclusion gifts and direct tuition payments to grandchildren remain available without any GST planning.

Related Estate Tax Planning Topics

• GST Trust – How a generation-skipping trust is drafted and funded so the inclusion ratio is zero and the assets stay out of each child’s estate.
• Dynasty Trust – Extending GST-exempt planning across generations, and how New York’s rule against perpetuities affects the choice of governing law.
• Form 709: When to File a Gift Tax Return – The return on which GST exemption is allocated or automatic allocation is switched off.
• New York Estate Tax in 2026 – The $7,350,000 exclusion, the cliff and the rate table that apply at each generation unless the assets are held in trust.

Talk to Us About GST Planning

We draft generation-skipping trusts, prepare the Form 709 allocations that make them exempt, and review existing trusts for allocation errors before they become taxable terminations. If you are making gifts to grandchildren or funding a trust that could outlast your children, we can tell you where your exemption stands and what needs to be filed. Call 212-233-1233 or email [email protected] to schedule a consultation.