Generation-Skipping Trust in New York: Benefits and How to Set One Up

Reviewed by Albert Goodwin, Esq., a New York estate planning and probate attorney with offices in Manhattan, Brooklyn, and Queens. Last updated for the 2025 tax year.

A generation-skipping trust (GST) — often structured as a dynasty trust — is one of the most powerful tools available to affluent New York families who want to pass wealth to grandchildren and later generations while minimizing federal transfer taxes. Below, we focus on what actually matters to clients: the concrete benefits of a GST trust, how New York's own estate tax affects the planning, and the practical steps to set one up.

The real benefits of a generation-skipping trust

Most explainers bury the benefits under pages of tax theory. Here is why New York families actually use these trusts:

• Multi-generational (dynasty) wealth preservation. Properly drafted and allocated, a GST-exempt trust can hold and grow assets for grandchildren, great-grandchildren, and beyond, with the assets passing free of estate tax at each generational level for as long as the trust lasts.
• Leveraging the GST exemption. By allocating your federal GST exemption to assets while they are still relatively low in value, all future appreciation inside the trust escapes both the estate tax and the generation-skipping transfer tax — sometimes shielding tens of millions of dollars of future growth from a 40% tax.
• Creditor and divorce protection. Assets held in a properly structured discretionary trust are generally beyond the reach of a beneficiary's creditors and, when drafted correctly, are typically not treated as marital property subject to equitable distribution if a beneficiary divorces.
• Control over how and when descendants receive wealth. A GST trust lets you keep assets in trust — protected and professionally managed — rather than handing a large inheritance outright to a young or financially inexperienced grandchild.
• Avoiding a second layer of estate tax. Leaving assets to a child who then leaves them to a grandchild exposes the wealth to estate tax twice. A GST trust is designed to avoid that second toll.

If you are considering a generation-skipping or dynasty trust, the Law Offices of Albert Goodwin can help you evaluate whether it fits your situation. Call 212-233-1233 or email [email protected].

Who actually needs to worry about the GST tax?

The generation-skipping transfer tax only applies to transfers above a large federal exemption, so most families never trigger it. For 2025, the federal estate, gift, and GST tax exemption is $13.99 million per individual (roughly $27.98 million for a married couple using both spouses' exemptions). The flat tax rate on transfers above the exemption — for both estate tax and GST tax — is 40%.

Important — the 2026 sunset. Under current law, the elevated exemption enacted by the 2017 Tax Cuts and Jobs Act is scheduled to drop by roughly half at the end of 2025, to an inflation-adjusted figure expected to be in the range of $7 million per person, unless Congress acts. Families with estates above that lower threshold should review their planning now, because the window to lock in the higher exemption with lifetime gifts to a GST trust may be closing. (Tax laws change frequently; confirm current figures with counsel before acting.)

The federal annual gift exclusion is $19,000 per recipient in 2025, and direct payments of tuition (to the school) and medical expenses (to the provider) remain unlimited and free of gift and GST tax under IRC § 2503(e).

How New York taxes interact with GST planning

This is where New York residents need state-specific advice — and where generic national articles fall short.

• New York has no separate gift tax and no separate generation-skipping transfer tax. The GST tax is purely federal. So the GST mechanics described below are federal issues.
• New York does impose its own estate tax, and its exemption is far lower than the federal one. For deaths in the period beginning April 1, 2025, the New York basic exclusion amount is approximately $7.16 million (the figure is adjusted annually). Estates above the New York threshold owe New York estate tax at rates up to 16%, separate from any federal tax.
• The New York "estate tax cliff." Under N.Y. Tax Law § 952, if a New York taxable estate exceeds 105% of the basic exclusion amount, the exclusion is lost entirely and the entire estate is taxed — not just the portion above the exemption. This cliff can cost a New York estate hundreds of thousands of dollars, and it makes coordinated planning (including charitable gifts and lifetime transfers to trusts) especially valuable for New Yorkers whose estates hover near the threshold.
• New York has no portability. Unlike the federal system, New York does not let a surviving spouse use a deceased spouse's unused state exemption. For married New York couples, credit-shelter and dynasty-trust planning is often essential to avoid wasting the first spouse's New York exemption.
• The three-year add-back. New York pulls certain gifts made within three years of death back into the taxable estate, which affects the timing of lifetime gifts to a GST trust.

For New York families, the practical upshot is that a well-drafted GST/dynasty trust often has to solve two problems at once: the federal GST tax for the very wealthy, and the much-lower-threshold New York estate tax and its cliff for a far larger group of families.

How the generation-skipping transfer tax works

The GST tax exists to prevent families from "skipping" a generation of estate tax. If you leave property directly to a grandchild instead of to your child, the wealth passes through one fewer estate — and would otherwise be taxed one fewer time. The Internal Revenue Code's GST tax (IRC §§ 2601–2664) imposes an additional tax to make up for that skipped layer.

The GST tax applies to three types of generation-skipping transfers:

Direct skip

A direct skip is a transfer to a "skip person" — generally a grandchild, anyone two or more generations below you, or an unrelated person more than 37½ years younger than you. Under IRC § 2651(e), if your child has already died, your grandchild "moves up" a generation and the transfer is not a skip. The transferor (or the estate) pays the GST tax on a direct skip.

Taxable distribution

A taxable distribution is any distribution from a trust to a skip person that is not a direct skip or taxable termination. Here the recipient pays the GST tax. A trust itself can be a "skip person" if all of its beneficial interests are held by skip persons.

Taxable termination

A taxable termination occurs when an interest in trust property ends — for example, when the last non-skip beneficiary dies — and afterward only skip persons can benefit. The trustee pays the GST tax. Example: you fund a trust for your son and his three children. While your son (a non-skip person) holds an interest, there is no taxable termination. When your son dies and only your three grandchildren remain as beneficiaries, a taxable termination occurs on the value of the trust property.

Current numeric illustrations (2025)

Illustration 1 — no planning. Suppose your estate is $14.3 million and, because your only child is already wealthy, you leave the entire amount outright to your granddaughter. The roughly $310,000 above the $13.99 million federal exemption is exposed to federal estate tax, and because the transfer skips a generation, that same excess is also exposed to a 40% GST tax — a double hit. Separately, because the estate exceeds New York's far lower threshold, New York estate tax applies as well (and, near the cliff, potentially on the entire estate).

Illustration 2 — using the exemption. Suppose during life you gave a grandson $8 million and, at death in 2025, you leave a $8 million Hamptons home to your granddaughter. Your $8 million lifetime gift is sheltered by your $13.99 million exemption. But the remaining $5.99 million exemption does not cover the full $8 million bequest, so roughly $2.01 million is exposed to both estate and GST tax — illustrating why allocating your GST exemption deliberately, rather than by default, matters.

How to set up a generation-skipping (dynasty) trust in New York

Creating a simple trust does not avoid the GST tax — distributions to grandchildren remain taxable distributions. A GST trust must be deliberately designed and the GST exemption affirmatively allocated. The general process looks like this:

1. Identify your goals and beneficiaries. Decide whether you want a multi-generation dynasty trust, asset protection for descendants, charitable components, or a combination.
2. Choose the trust structure. Common approaches include an irrevocable lifetime dynasty trust funded with gifts (to lock in today's high exemption), or a trust created at death under your will or revocable trust. The trust can be drafted as GST-exempt (exemption allocated, inclusion ratio of zero) or split into GST-exempt and non-exempt shares.
3. Allocate your GST exemption. The key to a successful GST trust is allocating exemption so the trust's inclusion ratio is zero, meaning no GST tax will ever be imposed on distributions or terminations. This is reported on a gift or estate tax return.
4. Select a trustee. Choose an independent individual or corporate trustee (such as a bank or trust company) able to administer the trust impartially for decades. Trustee selection affects both tax outcomes and asset-protection strength.
5. Draft protective terms. Discretionary distribution standards, spendthrift provisions, and carefully limited powers of appointment provide creditor and divorce protection without unintentionally pulling assets back into a beneficiary's taxable estate.
6. Coordinate with New York estate tax. Because New York's exemption and cliff differ from the federal rules, the trust must be modeled against both systems — including the lack of New York portability for married couples.

An alternative structure under IRC § 2642(c)

One technique gives a single skip-person beneficiary a general power of appointment so that the trust property is included in that beneficiary's gross estate at death. Under IRC § 2642(c), the trust's inclusion ratio is zero — meaning no GST tax — if, during the skip person's life, no trust income or principal may be distributed to anyone other than that beneficiary, and the trust assets will be includible in the beneficiary's gross estate.

Example: You have $20 million and have already used your full exemption on lifetime gifts. You want to leave $4 million to a grandchild but fear both estate and GST tax. You instead transfer the $4 million into a trust with your grandchild as the sole beneficiary, giving the grandchild a testamentary general power of appointment to dispose of whatever remains in the trust at his or her death. Because that power causes the trust property to be included in the grandchild's estate, the transfer avoids the GST tax under IRC § 2642(c) — though the trade-off is estate-tax exposure in the grandchild's estate, which is why this structure must be weighed against a fully GST-exempt dynasty trust.

Frequently asked questions

Does New York have a generation-skipping transfer tax?

No. New York imposes no separate gift tax or GST tax. The GST tax is purely federal. However, New York does have its own estate tax with a much lower exemption and a "cliff," so New York residents still need coordinated planning.

What is the GST exemption for 2025?

For 2025 the federal estate, gift, and GST tax exemption is $13.99 million per individual, with a 40% rate on amounts above it. This elevated exemption is scheduled to be cut roughly in half after 2025 unless Congress changes the law.

Who pays the generation-skipping transfer tax?

It depends on the transfer type: the transferor or estate pays on a direct skip, the recipient pays on a taxable distribution, and the trustee pays on a taxable termination.

Is a generation-skipping trust the same as a dynasty trust?

A dynasty trust is a long-lasting trust designed to benefit multiple generations; it is typically structured to be GST-exempt so that wealth passes to descendants without repeated transfer taxes. In practice the terms are often used together.

Related New York estate planning topics

• Advanced New York estate planning techniques
• Benefits of a living trust
• Advantages and disadvantages of a testamentary trust
• Benefits of a special needs trust
• Working with a trust attorney in NYC

Speak with a New York trusts and estates attorney

Generation-skipping and dynasty trusts involve the interaction of federal transfer tax rules and New York's own estate tax — and the planning is unforgiving of mistakes. The figures and rules above change frequently, so do not rely on them without current, individualized advice. The Law Offices of Albert Goodwin maintain offices in New York City, Brooklyn, and Queens. Call 212-233-1233 or email [email protected] to discuss whether a GST trust fits your family's goals.

This article is for general information and is not legal or tax advice. Tax exemption amounts and rules are adjusted periodically and may change; consult a qualified attorney about your specific circumstances.