Generation-Skipping Tax: Rate, Exemption and Examples for Parents

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

The generation-skipping transfer (GST) tax is a federal tax on gifts and bequests to grandchildren, or to anyone else two or more generations below the giver, including through a trust. For 2026 the rate is a flat 40%, and each person has a $15,000,000 GST exemption, so a married couple can shelter $30,000,000 before any GST tax applies (IRS, Rev. Proc. 2025-32). The tax applies in addition to any estate or gift tax, so a large transfer that skips a generation can owe both unless exemption covers it.

For a California or Washington family earning $750,000 to $3 million with children under 12, the GST tax shows up in two places. The first is your own parents: grandparents who want to pay school tuition, fund a 529 or leave money to your kids. The second is you: if you set up a trust for your children that may one day pass to their children, the GST paperwork you file (or skip) this year decides whether decades of growth are later taxed at 40%.

Who counts as a “skip person”

The IRS calls the recipient a skip person. A person is a skip person if they are assigned to a generation two or more generations below the giver (Form 709 instructions). In practice:

• Grandchildren and great-grandchildren are skip persons.
• Your own children are not. A gift from you to your 8-year-old is an ordinary gift, not a generation-skipping transfer.
• A trust can be a skip person when only skip persons can benefit from it, for example a trust a grandparent sets up only for grandchildren.
• The predeceased parent rule: if your child has died, a gift to that child’s children is treated as a gift to your child’s generation, so it does not skip (Form 709 instructions).

There are three ways a transfer can trigger the tax. A direct skip is a gift straight to a grandchild or a grandchild-only trust. A taxable distribution is a payment from a trust to a grandchild while the trust continues. A taxable termination happens when the last non-skip beneficiary (usually your child) dies or loses their interest and the trust passes to grandchildren.

How the generation-skipping tax rate is calculated

The rate is not a bracket table. Under IRC section 2641, the “applicable rate” is the maximum federal estate tax rate multiplied by the transfer’s inclusion ratio. The top rate for gifts and generation-skipping transfers is 40% (Form 709 instructions). The inclusion ratio is roughly 1 minus the share of the transfer covered by GST exemption.

The ratio is set when exemption is allocated and is recalculated only if new money is added to the trust. A trust with an inclusion ratio of zero stays fully exempt no matter how large it grows. That is the single most useful fact about the GST tax, and the reason the timing of the allocation matters more than the rate.

If you came here from a quiz question: for 2025 the GST tax used a 40% rate and a $13,990,000 exemption, so x = 40. For 2026 the exemption is $15,000,000 per person, made permanent by the 2025 tax law and indexed for inflation from 2027 (IRS). Older articles that warn the exemption “drops to about $7 million in 2026” are out of date.

What is exempt before the $15 million exemption is even touched

Most grandparent gifts to young grandchildren never use any GST exemption, because two exclusions come first.

• Tuition and medical bills paid directly. Payments made straight to a school or a medical provider are excluded from gift tax under section 2503(e), and IRC section 2611(b)(1) excludes them from the definition of a generation-skipping transfer. There is no dollar cap. A check to the child or to you does not qualify.
• Annual exclusion gifts. For 2026 each grandparent can give $19,000 per grandchild ($38,000 per couple with gift splitting) without using lifetime exemption (Rev. Proc. 2025-32). Present-interest gifts covered by the annual exclusion are generally excluded from GST tax. A gift to a trust only gets this treatment if the trust is for that one grandchild during their life and is includible in their estate at death (Form 709 instructions). Many family trusts do not meet that test, so annual exclusion gifts to them still need GST exemption allocated.

Worked example 1: grandparents helping two grandchildren in the Bay Area

Assumptions: you and your spouse are a physician and a Genentech scientist in San Mateo with a 4-year-old and a 7-year-old. Your parents, both alive, have an estate of about $12 million and want to help.

1. Private school. They pay $45,000 a year of tuition per child directly to the school. That is $90,000 a year with no gift tax, no GST tax and no exemption used, because the payment goes to the school, not to you (section 2611(b)(1)).
2. 529 plans. Each grandparent elects five-year treatment and contributes $95,000 per grandchild for 2026 (5 x $19,000), so $190,000 per grandchild and $380,000 in total. Under IRC section 529(c)(2), a 529 contribution is a completed gift of a present interest, and the five-year election applies for both gift and GST tax purposes. The election is made on Form 709, and no exemption is used as long as the grandparents make no other annual exclusion gifts to those grandchildren during the five years (Form 709 instructions).
3. A larger gift. If they give $500,000 outright to one grandchild during the five-year 529 period, the annual exclusion for that grandchild is already used, so the full $500,000 uses part of their gift exemption and the same amount of GST exemption. (After the five years, the annual exclusion for that year would cover part of a gift.) There is still no tax to pay, because each grandparent has $15,000,000 of each. They file Form 709.

The point for your family: grandparent gifts to young children rarely create GST tax. The real risks are paperwork (a missed Form 709 or five-year election) and giving outright when a custodial account or trust would serve the child better. If gifts land in a UTMA account, remember the money becomes the child’s at 18 to 25 depending on how the transfer was set up (see what happens to a UTMA at 21).

Worked example 2: your own trust for your children

Assumptions: a Seattle household with $1.2 million of W-2 income and Amazon RSUs, net worth about $9 million. In 2026 the parents put $2,000,000 into an irrevocable trust for their two children, designed to last for the children’s lives and then pass to grandchildren. We assume 6% annual growth for 40 years. These are illustrations, not projections.

• $2,000,000 growing at 6% for 40 years is about $20.6 million ($2,000,000 x 1.06⁴⁰).
• With $2,000,000 of GST exemption allocated on a timely Form 709: the inclusion ratio is 0. When the children die and the trust passes to grandchildren, the GST tax is $0 on the full $20.6 million.
• With no exemption allocated: the inclusion ratio is 1. At the taxable termination the GST tax would be about 40% of $20.6 million, roughly $8.2 million.

The automatic allocation rules under section 2632(c) may cover a trust like this, and donors can elect in or out on Form 709 (Form 709 instructions). Do not rely on the default. Ask your estate attorney to state on the return exactly how exemption is allocated.

For a Washington family there is a second reason to fund a trust like this during life. Outright lifetime gifts are generally not taxable for Washington estate tax purposes (WA DOR estate tax FAQ), and Washington has its own estate tax with an exclusion of $3,076,000 for deaths from January 1 to June 30, 2026 and $3,000,000 for deaths from July 1 to December 31, 2026 (WA DOR), far below the federal $15,000,000. California has no state estate tax (CA State Controller). The GST tax itself is federal, so the 40% rate and $15,000,000 exemption are the same in both states.

The decisions a CA or WA family actually has to make

1. Should trusts for your kids last beyond their lifetimes? A trust that pays out to a child at 30 usually never skips a generation, so GST matters only if the child dies first and the assets pass to grandchildren. A lifetime or “dynasty” trust can help protect assets from a child’s divorce or creditors and then pass to grandchildren, and that design needs GST exemption allocated. This is the question to raise with your attorney (see questions to ask an attorney about inheritance).
2. Which assets go into the exempt trust? Assets expected to grow fastest get the most value from a zero inclusion ratio, because all future growth is sheltered. Some families pair this with a grantor trust so they pay the trust’s income tax themselves; that structure has trade-offs (see disadvantages of intentionally defective grantor trusts).
3. Who is the trustee? A trust that may run 60 years or more needs a trustee plan and successors (see what a fiduciary trust is).
4. Do beneficiary designations match the plan? Brokerage and retirement accounts pass by beneficiary form, not by your will (see naming a trust as beneficiary of a brokerage account).

Common mistakes

• Grandparents paying tuition to the parents instead of the school, which turns an unlimited exclusion into a taxable gift.
• Not filing Form 709 for a 529 five-year election or a trust gift, so the election or the allocation is lost.
• Assuming annual exclusion gifts to a family trust are GST-exempt. They often are not, unless the trust meets the single-beneficiary test.
• Using stale numbers. The exemption is $15,000,000 per person for 2026, not $13,990,000 (2025) and not a projected $7 million.

What to document for your children

A long-term trust can outlive both parents by decades. Your grandchildren will inherit the trust document, not the conversation you had when you signed it. Write a one-page letter alongside the trust that explains why you made it last beyond your children’s lives, what you hoped it would pay for, and how you expect the trustee to think about requests. As Kevin puts it, “Conversations fade. Documentation compounds.”

Frequently asked questions

Does a grandparent’s 529 contribution trigger generation-skipping tax?

Usually not. A 529 contribution is treated as a completed present-interest gift, so a contribution within the $19,000 annual exclusion for 2026, or up to $95,000 with the five-year election, is generally not a taxable generation-skipping transfer. Larger contributions use part of the grandparent’s $15,000,000 GST exemption. A Form 709 is needed for the five-year election.

Does California or Washington have its own generation-skipping tax?

The generation-skipping transfer tax discussed here is a federal tax, with a 40% rate and a $15,000,000 per-person exemption for 2026. California has no state estate tax. Washington has an estate tax with a $3,000,000 to $3,076,000 exclusion in 2026 depending on the date of death, so Washington families should plan for both.

Is generation-skipping tax paid in addition to estate tax?

It can be, which is why the exemption matters. A bequest to a grandchild above both exemptions can face estate tax and GST tax. In practice, each person’s $15,000,000 estate exemption and separate $15,000,000 GST exemption for 2026 mean most families with estates under that level owe neither, if the GST exemption is allocated correctly.

Next step

Pull your current trust documents and ask your attorney one question: does any trust for our children continue past their lifetimes, and if so, how was GST exemption allocated on our Form 709? If you would like help organizing that review alongside your tax and estate plan, our estate planning and family governance work covers it, and the Tax & Wealth Assessment is where we start.

This is general education, and the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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