A Generation-skipping Trust (GST) is an irrevocable trust designed to transfer wealth down multiple generations while bypassing the estate tax that would normally apply at each generational level (e.g., at the death of your children).
Under IRC §2651, a transfer is subject to the Generation-Skipping Transfer Tax (GSTT) if it is made to a “skip person.” A skip person is a beneficiary who is at least two generations below you (such as a grandchild or great-grandchild) or an unrelated individual who is at least 37.5 years younger than you.
The GSTT is a flat tax imposed at the highest federal estate tax rate (currently 40%). However, under the OBBBA, each individual is granted a permanent, inflation-indexed lifetime GST exemption of $15 million (current for 2026; $30 million for a married couple utilizing reciprocal planning). By allocating your GST exemption to transfers into a GST trust, you can establish an “inclusion ratio” of zero. Once a trust has an inclusion ratio of zero, the entire trust corpus—and all future appreciation—is permanently shielded from GSTT on all future distributions and terminations, no matter how large the trust grows.
The GSTT applies to three types of taxable events:
An outright transfer of assets during life or at death directly to a skip person or to a trust solely for the benefit of skip persons. For lifetime direct skips, the transferor pays the GSTT on Form 709 on a tax-exclusive basis.
A distribution of trust income or principal to a skip person. The skip person beneficiary is responsible for paying the GSTT using Form 706-GS(D) and must be provided with Form 706-GS(D-1) by the trustee.
The termination of a non-skip person’s interest in a trust (for example, when your child dies, leaving only grandchildren as beneficiaries). The trustee pays the GSTT from the trust assets using Form 706-GS(T) on a tax-inclusive basis.
A Crummey withdrawal power is a standard drafting technique that converts a gift of a future interest in an irrevocable trust into a present interest, qualifying the contribution for the annual gift tax exclusion under IRC §2503(b) (currently $19,000 per donee in 2026). The beneficiary is given a temporary right (typically 30 days) to withdraw the contributed amount.
However, a dangerous trap exists for multi-generational trusts. Under IRC §2642(c), a contribution that qualifies for the gift tax annual exclusion using Crummey powers does not automatically qualify for the GSTT annual exclusion. To qualify for the GSTT annual exclusion, the trust must be a vested, single-beneficiary trust where:
If your trust has multiple beneficiaries (e.g., a common pot trust for children and grandchildren), contributions shielded by Crummey powers for gift tax purposes will not have a zero GST inclusion ratio. You must explicitly allocate a portion of your lifetime GST exemption on Form 709 to prevent future taxable distributions or taxable terminations from triggering a 40% GSTT.