GST Trust (Generation-Skipping Trust) in New York

A GST trust holds an inheritance for your children for their lifetimes and passes it to grandchildren without federal estate tax, New York estate tax or GST tax at your children’s deaths. This page explains how one is drafted, funded and taxed.

When a New York parent leaves $5,000,000 outright to a child, the money becomes part of the child’s estate. If the child is already comfortable, that inheritance may sit untouched, grow, and be taxed a second time when the child dies, by the federal government at 40% and by New York at rates up to 16%. A GST trust is the standard tool for avoiding that second round. The child can use the money for life, but it never becomes part of the child’s taxable estate.

We draft these trusts for families across the New York metropolitan area, and the concept is simpler than the name suggests. The hard parts are the details: getting the exemption allocated, keeping exempt and non-exempt shares apart, choosing the right trustee and powers, and understanding the income tax trade-off. This page covers each of those. For the tax itself, see our page on the generation-skipping transfer tax.

A GST Trust Is Not the GST Tax

The generation-skipping transfer tax is a flat 40% federal tax imposed when wealth passes to a “skip person,” meaning a grandchild, a more remote descendant, or an unrelated person more than 37.5 years younger than the transferor (IRC § 2651). A GST trust, sometimes called a GST-exempt trust or generation-skipping trust, is a trust to which the transferor has allocated GST exemption so that the tax never applies to it. The trust is the solution; the tax is the problem.

The label is used loosely. Some people use “GST trust” to mean a trust that benefits grandchildren directly, but the more common and more useful design benefits the children first, for their entire lives, and only then passes to grandchildren. The point is not to bypass the children but to let them enjoy the inheritance without owning it in a way the estate tax can reach.

How a GST Trust Is Structured

A well-drafted New York GST trust usually contains these elements:

Separate lifetime trusts for each child

At the parent’s death (or at funding during life), the assets divide into a separate trust for each child. Each trust lasts for that child’s lifetime, and whatever remains at the child’s death continues in trust for, or passes to, the child’s own descendants.

Access to income and principal for health, education, maintenance and support

The child can receive income and principal for these four purposes, the so-called HEMS standard. That standard is broad enough to cover a comfortable life but is an “ascertainable standard” that keeps the assets out of the child’s estate even if the child serves as a trustee.

A limited power of appointment

The child can typically direct, by will, how the remaining assets pass among the parent’s descendants, and sometimes among spouses of descendants or charities. Because the power cannot be exercised in favor of the child, the child’s estate or the child’s creditors, it does not cause estate inclusion.

An independent trustee for discretionary distributions

Distributions beyond the HEMS standard, such as a large gift to help a grandchild buy a home, are left to an independent trustee. The child may be a co-trustee for investments, or may hold the power to remove and replace the independent trustee, but the discretionary tap stays in independent hands.

These features are the same ones we describe on our generation-skipping trust attorney page.

Allocating GST Exemption So the Inclusion Ratio Is Zero

A trust for children with remainder to grandchildren is only “GST-exempt” if GST exemption is actually allocated to it. Each person has $15,000,000 of GST exemption in 2026 (IRC § 2631). Allocating exemption equal to the full value of the property transferred gives the trust an inclusion ratio of zero (IRC § 2642), which means no GST tax at the child’s death or on any later distribution to grandchildren, regardless of how much the trust has grown by then.

The allocation is made on Form 709 for lifetime transfers and on Form 706 for transfers at death. Three rules of practice follow:

• Allocate at funding. Exemption is measured against the value on the date of the transfer. Allocate promptly, while the value is known and, ideally, low.
• Never mix exempt and non-exempt property in one trust. If a parent has more to leave than the available exemption, the excess goes into a separate non-exempt trust with identical terms. A single trust with an inclusion ratio between zero and one is taxed in part on every distribution to a grandchild for the rest of its existence.
• Do not rely on the statutory “GST trust” definition. IRC § 2632(c) automatically allocates exemption to lifetime gifts to a “GST trust,” a definition built from a list of exceptions that turn on how much of the trust could be distributed to non-skip persons and when. Many trusts drafted with HEMS standards and powers of appointment land on an unintended side of that line. Good drafting does not depend on the definition; the Form 709 either allocates or elects out, expressly, every time.

Funding During Life Versus at Death

A GST trust can be created and funded during the parent’s lifetime, or it can be created under the parent’s will or revocable trust and funded at death. Both work. Lifetime funding is usually better for a family that can afford it, for three reasons.

First, appreciation leaves the parent’s estate. A lifetime gift uses gift and GST exemption at today’s value, and everything the assets earn afterward is outside both the parent’s and the child’s estate. Funding at death uses exemption at the higher date-of-death value. Second, New York has no gift tax. A lifetime gift removes assets from the New York estate as well, subject only to the three-year add-back for gifts made within three years of death (Tax Law § 954(a)(3)). Third, and specific to New York, lifetime funding addresses the cliff at both generations at once. The parent’s New York estate shrinks, which can bring it under the $7,350,000 exclusion or away from the $7,717,500 cliff, and the assets are also never in the child’s New York estate.

The parent’s revocable trust or will should nonetheless contain the same GST trust provisions as a fallback, so that whatever remains at death flows into the same structure and the executor allocates any remaining GST exemption on Form 706.

New York Estate Tax Savings at the Child’s Generation

New York has no GST tax of its own (repealed effective 2014), but it does have an estate tax with a $7,350,000 exclusion for 2026 and a cliff that taxes the entire estate once the taxable estate exceeds $7,717,500. Assets in a properly drafted GST trust are not part of the child’s New York gross estate. That single fact is often worth more to a New York family than the federal savings, because many children who will never approach the $15,000,000 federal exclusion will easily exceed New York’s. Consider a Westchester daughter with her own $4,000,000 estate who inherits $4,000,000 from her mother.

The daughter had full use of the inheritance for her lifetime in both columns. The only difference is the wrapper. You can test other figures on our New York estate tax cliff calculator.

Creditor and Divorce Protection for Children

Because the child does not own the trust assets, they are generally beyond the reach of the child’s creditors, and a spendthrift clause prevents the child from pledging or assigning his or her interest. In a divorce, an inheritance held in a discretionary trust with an independent trustee is far harder for a former spouse to reach than an inheritance the child deposited into a joint account. Many clients choose a GST trust for this reason alone, particularly for children who are physicians, business owners, or in unstable marriages.

Income Tax and Basis: The Trade-Off

A lifetime GST trust is usually drafted as a grantor trust (IRC §§ 671–679) while the parent is alive. The parent pays the income tax on the trust’s earnings, which is not treated as an additional gift (Rev. Rul. 2004-64), so the trust grows tax-free from the family’s point of view while the parent’s taxable estate shrinks by the tax paid. After the parent’s death, the trust becomes a separate taxpayer, and income that is distributed is taxed to the child.

The trade-off concerns basis. Assets that pass through a decedent’s estate receive a stepped-up basis at death (IRC § 1014). Assets in a GST trust are, by design, not in the child’s estate, so they do not receive a step-up at the child’s death, and assets gifted during the parent’s life carry over the parent’s basis (IRC § 1015) rather than stepping up at the parent’s death either (Rev. Rul. 2023-2). For a child whose estate would owe no tax, a step-up may be worth more than the estate tax saved. See our page on the step-up in basis.

Good drafting solves this. The independent trustee can be given authority to grant a child a general power of appointment over some or all of the trust assets. Exercising that authority causes those assets to be included in the child’s estate and therefore to receive a step-up. For a child with a small estate, the trustee can include just enough to absorb the unused federal and New York exclusions, obtaining a basis step-up at no estate tax cost. For a child with a large estate, the trustee leaves the power ungranted and the assets stay out.

How a GST Trust Becomes a Dynasty Trust in New York

A GST trust that continues past the grandchildren’s generation, keeping assets in trust for great-grandchildren and beyond, is a dynasty trust. The tax mechanics are identical; the difference is duration. Here New York law imposes a limit. Under the New York rule against perpetuities (EPTL 9-1.1), a trust must vest within lives in being at its creation plus 21 years. A trust governed by New York law can therefore last for the lifetimes of the children and grandchildren who are alive when it is created, plus 21 years, but it cannot last forever. Families who want a perpetual trust use the law of a state that has abolished the rule, with a trustee in that state. We discuss that choice on our dynasty trust page.

Who Should Use a GST Trust, and Common Pitfalls

A GST trust makes sense for a New York parent whose children are likely to have estates of their own near or above New York’s $7,350,000 exclusion, for a parent whose combined family wealth approaches the federal $15,000,000 per-person exclusion, and for any parent who wants an inheritance shielded from a child’s creditors or divorce. It is less useful where the children will need to spend the inheritance and their own estates will never approach the New York exclusion; there the loss of the step-up may outweigh the benefit.

• Exemption never allocated. The trust was drafted as a GST trust, but no Form 709 or Form 706 allocated exemption, and the trust has an inclusion ratio of one. This is the most common error we find.
• Exempt and non-exempt assets in one trust. A fractional inclusion ratio that could have been avoided with two trusts.
• The child as sole trustee with unrestricted powers. Distribution powers beyond an ascertainable standard, or a power of appointment exercisable in favor of the child, can pull the trust into the child’s estate.
• Relying on automatic allocation. The statutory definition is unpredictable; allocate or elect out expressly.
• Ignoring basis. Failing to give the trustee the power to grant a general power of appointment forfeits a step-up that might have cost nothing.
• Forgetting the three-year add-back. Lifetime gifts made within three years of death by a New York resident are added back to the New York estate.
• Wasting the first spouse’s exemption. The GST exemption is not portable. A plan that leaves everything outright to a surviving spouse loses it.

Related Estate Tax Planning Topics

• Generation-Skipping Transfer Tax – Skip persons, the three taxable events, the $15,000,000 exemption and the inclusion ratio.
• Dynasty Trust – Extending a GST trust across many generations and choosing a governing law without a perpetuities limit.
• The New York Estate Tax Cliff – Why an estate just over $7,717,500 is taxed from the first dollar, and how trusts keep a child below the line.
• Tax Basis: Step-Up and Carryover – The basis rules behind the GST trust trade-off, and when strategic estate inclusion makes sense.

Speak With Us About a GST Trust

We draft GST trusts as part of wills, revocable trusts and lifetime gift plans, prepare the returns that allocate the exemption, and advise trustees on distributions and basis planning for the decades that follow. If you want your children to enjoy their inheritance without handing a share of it to the federal government and New York at their own deaths, call 212-233-1233 or email [email protected].