Generation-Skipping Transfer Tax

Without a generation-skipping transfer tax (GST tax), a family could transfer wealth directly from grandparent to grandchild, skipping the parent's estate entirely and avoiding one full round of estate tax. The GST tax layers an additional tax on top of gift or estate tax when transfers "skip" a generation. Like the estate and gift taxes, the GST tax carries its own exemption amount — again unified with the others in various ways — and the applicable figures change under legislation. Families must work with qualified attorneys and CPAs to understand current rules.

The GST tax is the primary driver behind a structure known as a dynasty trust — a long-term trust designed to hold family wealth across multiple generations while using GST exemption efficiently. By funding a dynasty trust with assets sheltered by the GST exemption, families can allow wealth to grow inside the trust and benefit descendants for generations without triggering the GST tax at each generational transfer. Understanding this mechanism is a reason why family office legal entities can become intricate fairly quickly.

A hypothetical illustrates the stakes: a founder who sold her technology company for an illustrative $200 million might consult advisors about funding a dynasty trust with a portion of proceeds. Done correctly, that trust could benefit her children, grandchildren, and great-grandchildren without a GST tax event at each generational step. The annual gift exclusion has its own GST annual exclusion counterpart, adding another layer of planning opportunity that a coordinated family office team — legal, tax, and investment management — typically handles together.