Generation-Skipping Transfer Tax Attorney in New York & NJ

What Is the Generation-Skipping Transfer Tax?

The generation-skipping transfer (GST) tax is a federal tax imposed on transfers of property to "skip persons" — individuals who are two or more generations below the transferor. Grandchildren are the most common example. The GST tax is applied at a flat 40% rate, and it is levied in addition to any estate or gift tax that applies to the same transfer.

The GST tax was designed to close a loophole: without it, very wealthy families could transfer assets to grandchildren (skipping the children's estate tax exposure) and avoid one full cycle of estate taxation. Congress responded with the GST tax to ensure that each generation of wealth transfer is taxed at least once.

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When Does GST Tax Apply?

GST tax applies to three types of transfers:

**Direct skips.** A gift or bequest made directly to a grandchild or other skip person. For example, leaving $2 million to a grandchild in your will is a direct skip. GST tax is due in addition to any estate tax on the transfer.

**Taxable distributions.** Distributions from a trust to a skip person when the distribution is not subject to estate or gift tax. If a trust pays income to a grandchild and the trust has not been allocated sufficient GST exemption, a GST tax is owed on each distribution.

**Taxable terminations.** When a trust terminates and the remaining assets pass to skip persons — for example, when all intermediate beneficiaries (children) have died and the trust assets pass to grandchildren — a GST tax is triggered on the entire trust value.

Understanding which type of transfer applies to your situation is essential for allocating the GST exemption correctly and avoiding unexpected tax events.

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The GST Tax Exemption

The federal GST tax exemption for 2025 is $13,990,000 per person — exactly matching the estate and gift tax exemption. Every individual can allocate this amount to protect transfers to skip persons from GST tax.

**How allocation works.** GST exemption can be allocated to a transfer at the time of the gift, or it can be "automatically allocated" by IRS rules to certain transfers. Automatic allocation applies to direct skips and to contributions to certain trusts — but automatic allocation is not always the most efficient use of the exemption, and it can be inadvertently used in ways that leave other transfers unprotected. Intentional, documented allocation guided by an attorney ensures the exemption is applied where it produces the most long-term value.

**The 2026 sunset.** Like the estate and gift tax exemption, the GST exemption is scheduled to drop on January 1, 2026, to approximately $7 million per person. GST exemption allocated to a trust before the sunset protects all assets in that trust — including decades of future appreciation — at the current higher exemption amount.

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The Dynasty Trust: Multigenerational Protection

A Dynasty Trust is an irrevocable trust designed to hold and distribute family wealth across multiple generations — often 90 years or more, depending on state law. It is the most powerful tool available for protecting multigenerational wealth from estate, gift, and GST tax.

**How it works.** The grantor funds the Dynasty Trust with assets and allocates GST exemption to the contribution. Because the assets are held in trust — rather than passing outright through individual estates — they are not included in any beneficiary's taxable estate at death. Every generation of beneficiaries can receive distributions from the trust without triggering estate or GST tax. The trust effectively removes the assets (and all future appreciation) from the family's taxable estate — permanently.

**What it can hold.** Dynasty Trusts can hold a wide range of assets: investment portfolios, closely held business interests, real estate, life insurance, and more. Assets expected to appreciate significantly are particularly valuable to transfer into a Dynasty Trust early.

**New York rules.** New York's rule against perpetuities limits the duration of Dynasty Trusts to 90 years. Some families use trusts sited in other jurisdictions — such as South Dakota or Delaware — which have abolished the rule against perpetuities entirely, allowing trusts to run indefinitely. Our attorneys can advise on the appropriate siting strategy for your family's circumstances.

**Control and flexibility.** A well-drafted Dynasty Trust gives the trustee discretion to make distributions to beneficiaries across generations for health, education, maintenance, and support — while keeping assets protected from the beneficiaries' creditors, divorcing spouses, and estate taxes.

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Annual Exclusion Gifts to Skip Persons

The annual gift tax exclusion ($19,000 per recipient in 2025) also provides a GST-free channel for gifts to grandchildren. Annual exclusion gifts to skip persons are generally not subject to GST tax (subject to specific rules for trusts). These gifts do not reduce the GST exemption and do not require a Form 709 filing.

Direct tuition and medical payments on behalf of grandchildren are also excluded from both gift and GST tax, with no dollar limit, when paid directly to the institution.

These exclusions can fund significant transfers over time without touching the lifetime GST exemption — allowing that exemption to be reserved for Dynasty Trust funding and other larger strategic transfers.

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Coordinating GST Planning with Estate and Gift Tax Planning

The GST tax does not exist independently of the estate and gift tax — all three are part of a unified federal transfer tax system. Every major estate planning decision affects all three taxes simultaneously. This is why GST planning must always be done in the context of a complete estate and gift tax strategy.

For example: a GRAT transfers appreciation to heirs free of estate and gift tax — but if the heirs are grandchildren, the GRAT should also include a GST exemption allocation to avoid exposing the transferred appreciation to GST tax. Similarly, a Dynasty Trust funded without proper exemption allocation can create taxable terminations or distributions decades later when the grantor is no longer alive to correct the oversight.

Comprehensive planning accounts for all three taxes at once.

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New Jersey Considerations

New Jersey does not impose a separate GST tax; only federal rules apply to NJ residents. However, NJ's inheritance tax applies to transfers to non-immediate-family members, including grandchildren, at rates up to 16% — though the inheritance tax does not apply to transfers to lineal descendants (children, grandchildren) when they are immediate family members. NJ-specific planning should address the interplay between the NJ inheritance tax and federal GST tax, particularly for families with assets in both states.

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