Generation-Skipping Trust Planning for UHNW Families

Not tax or legal advice. Verify all figures and strategies with qualified estate counsel before acting.

The generation-skipping transfer (GST) tax exists because Congress noticed that wealthy families could — with careful trust drafting — skip the estate tax at every generation. A grandparent funds a trust; the trust benefits children, then grandchildren, then great-grandchildren; and the 40% estate tax never bites because the trust assets never land in any individual's taxable estate at death.

Congress's answer was a second layer of 40% tax — the GST tax — on transfers that skip a generation. Understanding how it works, and how to use your $15M GST exemption with maximum efficiency, is one of the most consequential decisions in a $30M+ estate plan.

How the GST tax works

The GST tax is a flat 40% tax on "generation-skipping transfers" — transfers to "skip persons," meaning people who are two or more generations below the transferor. For most families, skip persons are grandchildren and more remote descendants.¹

There are three types of GST events:

• Direct skip: An outright transfer directly to a grandchild (or a trust that benefits only grandchildren and younger). The 40% GST tax is due immediately. If the transfer is made during lifetime, you pay both gift tax and GST tax; at death, estate tax and GST tax.
• Taxable termination: A trust terminates and assets pass to a skip person. Example: a trust pays income to your child (non-skip); child dies; remaining assets pass to grandchildren (skip). The passage triggers GST tax on the full trust value at termination.
• Taxable distribution: A distribution from a trust to a skip person when non-skip persons also have interests in the trust. Example: a trust allows distributions to children and grandchildren; the trustee distributes to a grandchild — that distribution is a taxable distribution subject to GST.

The $15M GST exemption — and why non-portability changes everything

Each individual has a $15,000,000 GST exemption for 2026 — the same amount as the estate and gift tax exemption — after the OBBBA (One Big Beautiful Bill Act, July 2025) permanently increased and locked both figures.² The GST exemption is indexed for inflation starting in 2027.

But here is the critical difference between the estate tax exemption and the GST exemption: the GST exemption is not portable between spouses.

Under the estate tax portability rules (introduced in 2010), a surviving spouse can claim their deceased spouse's unused estate tax exemption by filing a timely portability election. If one spouse dies with $5M of unused exemption, the surviving spouse gets $5M added to their own $15M — for a $20M combined shield. This doesn't apply to GST exemption at all.

The planning implication: For married couples, you must use both spouses' GST exemptions intentionally, during lifetime, through trust structures and gifts. You cannot wait for the second spouse's death and rely on portability to transfer unused GST exemption. The spouse who dies first with unused GST exemption simply loses it.

What this means at $30M–$60M:

• A couple with $30M in assets has $30M of combined GST exemption (2 × $15M). Fully deploying both exemptions could shield the entire estate from GST — but requires coordinated trust structures for both spouses.
• A couple with $60M has the same $30M of combined exemption. $30M of assets will be inside GST-exempt trusts; $30M will eventually face GST tax at the skip-generation transfer — unless appreciation on exempt assets grows fast enough to offset the non-exempt side.

GST exemption allocation: automatic vs. elective

Your GST exemption isn't automatically applied to every transfer you make. The rules on when it applies automatically — and when you must elect it on Form 709 — are where many plans break down.³

Automatic allocation (IRC § 2632(b) and (c)):

• For direct skips made during lifetime (outright gifts to grandchildren), the GST exemption is automatically allocated unless you elect out.
• For transfers to "GST trusts" — broadly, trusts with skip-person beneficiaries that meet certain criteria — the exemption is automatically allocated if you don't elect out.

When automatic allocation doesn't apply:

• Transfers to trusts that also have non-skip beneficiaries (children and grandchildren both named) — automatic allocation may not apply, and you must file Form 709 to manually allocate.
• Testamentary transfers at death — you must rely on your executor to allocate any remaining exemption on the estate tax return (Form 706).
• Situations where you intentionally want to not allocate GST exemption (for example, to preserve exemption for a better use elsewhere).

Inclusion ratio: the number that determines GST exposure

Every trust subject to GST rules has an "inclusion ratio" between 0 and 1. This fraction determines how much GST tax applies to any future taxable distributions or terminations from the trust.¹

The formula: Inclusion Ratio = 1 − (GST Exemption Allocated ÷ Value of Transfer at Funding)

Examples:

• Inclusion ratio 0: You allocate $15M of GST exemption to a $15M trust at funding. 1 − (15M ÷ 15M) = 0. The trust is fully GST-exempt. All future growth — whether the trust grows to $50M or $200M — passes to grandchildren and great-grandchildren with zero GST tax. This is the goal.
• Inclusion ratio 1: You allocate no GST exemption to a $15M trust. 1 − (0 ÷ 15M) = 1. Every taxable termination or distribution from this trust to a skip person incurs 40% GST tax.
• Inclusion ratio 0.5: You allocate $7.5M of GST exemption to a $15M trust. 1 − (7.5M ÷ 15M) = 0.5. Half of every future taxable termination or distribution is subject to GST.

Why the inclusion ratio locks in at funding: Once set, the inclusion ratio on a trust generally does not change — even if the trust's assets appreciate dramatically. A trust funded with $5M and a 0 inclusion ratio remains fully GST-exempt even if it grows to $100M. This is the leverage: allocating $5M of GST exemption at the time of funding can protect far more than $5M in future value.

Dynasty trusts: the primary GST vehicle

A dynasty trust is designed to hold assets across multiple generations — grandchildren, great-grandchildren, and beyond — without any transfer tax event at each generation's death. Funded with GST-exempt transfers (0 inclusion ratio), a dynasty trust lets assets compound entirely outside the transfer tax system indefinitely.⁴

How the compounding math works: A dynasty trust funded with $10M in 2026 with a zero inclusion ratio, compounding at 7% annually, grows to approximately:

• $38M after 20 years
• $149M after 40 years
• $576M after 60 years
• Over $2 billion after 80 years

Every dollar of that growth is outside the estate tax and GST tax systems, permanently, because the trust was funded at inception with a zero inclusion ratio. Compare this to assets held outright, where each generation pays 40% estate tax on assets above their exemption at death.

What to put in a dynasty trust: The ideal assets are those expected to appreciate substantially over decades:

• Founder equity or early-stage company interests (pre-IPO, pre-exit)
• Private fund LP interests still early in the J-curve
• Real estate with long-term development upside
• Pre-liquidity QSBS shares (§ 1202 exclusion from inside the trust has nuances — discuss with counsel)

Marketable securities work but are less optimal from a leverage standpoint. The goal is to seed the trust with assets that will appreciate well beyond the GST exemption amount — so the full compounded value remains protected.

State selection: SD, NV, DE, and why it matters

Most states have a "Rule Against Perpetuities" (RAP) that limits how long a trust can last — typically 90 to 110 years. A trust governed by New York or California law may terminate, forcing distribution to grandchildren and triggering the GST tax the dynasty trust was designed to avoid.

Three states have eliminated the RAP for trusts:⁴

• South Dakota: No RAP. No state income tax on trust income distributed to non-resident beneficiaries. Strong directed trust statute (allows splitting investment and distribution authority). Domestic asset protection trust rules (2-year SOL). The most popular dynasty trust jurisdiction for UHNW families nationally.
• Nevada: No RAP. No state income tax. 2-year DAPT statute. Favorable creditor protection rules.
• Delaware: The original perpetual trust jurisdiction. Deep trust law infrastructure (sophisticated corporate trust companies). No state income tax on trust income accumulated inside the trust for non-Delaware beneficiaries.

You don't need to live there. A trust can be governed by South Dakota law regardless of where you live. The requirement is typically a South Dakota trustee (usually a directed trust company, which holds administrative authority while an investment advisor you appoint directs investments). This structure is common and fully recognized under federal law.

Trust protectors: For a trust designed to last 100+ years, no one can predict every relevant change in law, family composition, or circumstance. A "trust protector" — an independent third party named in the trust document — can be given authority to modify trust terms, change trustee, change trust situs, or decant to a new trust if the law changes. For perpetual dynasty trusts, trust protector provisions are considered best practice.

GRAT vs. IDGT for GST efficiency

If your goal is to get GST-exempt wealth to grandchildren, the choice of estate-freeze vehicle matters significantly. GRATs and IDGTs both remove appreciation from your estate — but they behave very differently for GST purposes.⁵

Why GRATs are inefficient for GST:

• A GRAT funded with $5M of pre-IPO equity may produce a remainder of $15M for heirs when the company goes public. That $15M remainder needs $15M of GST exemption allocated at the end — not $5M. You can't pre-allocate GST exemption at GRAT inception and get the leveraged result, because the taxable gift at GRAT funding is approximately zero (zeroed-out GRAT) — and you can't allocate exemption to a gift of zero. The GST exemption must be allocated to the remainder when it passes.
• This means the GST exemption is consumed at the post-appreciation value, losing all the leverage.

Why IDGTs are better for GST:

• An IDGT is typically seeded with a gift (commonly 10% of the intended transaction value) plus a sale of assets to the trust for a promissory note. The initial gift is the taxable event at inception — and GST exemption can be allocated to that gift at its current value.
• Example: You sell $5M of private equity interests to an IDGT for a $5M note, seeded with a $500K gift. You allocate $500K of GST exemption to the seed gift (achieving zero inclusion ratio on the seed). If structured correctly, the allocation covers the entire trust — including the note proceeds — as the exemption applies at the value at inception.
• Result: $500K of GST exemption protects what may become $20M+ in the trust after appreciation. That's 40× leverage on the GST exemption.

Annual exclusion gifts to skip persons

The 2026 annual gift exclusion is $19,000 per recipient ($38,000 per couple using gift splitting). Gifts within the annual exclusion to any individual — including grandchildren (skip persons) — are automatically exempt from both gift tax and GST tax, with no reduction in your $15M lifetime exemption.²

Gifts in trust to skip persons require Crummey powers: The annual exclusion applies only to gifts of "present interests." If you give $19,000 to a trust for a grandchild's benefit, it is a gift of a future interest — not eligible for the annual exclusion unless the trust gives the beneficiary a Crummey withdrawal right (a temporary right to withdraw the contribution). Crummey notices must be issued to the beneficiary (or guardian) each year; if they don't withdraw, the contribution stays in the trust.

Practical annual gifting math for a $30M family:

• 2 grandparents × $19,000 × 6 grandchildren = $228,000/year to grandchildren, fully GST-exempt
• Add annual gifts to children (non-skip persons) for additional estate reduction
• Over 20 years, $228K/year compounding at 7% inside GST-exempt trusts = approximately $9.4M transferred to grandchildren with zero transfer tax

At $30M+ of wealth, systematic annual giving to grandchild trusts with Crummey powers is a foundational program — not an afterthought.

529 superfunding as a GST strategy

The 529 5-year election ("superfunding") allows a lump-sum contribution of $95,000 per beneficiary ($190,000 per couple) to a 529 plan in one year, treated as if spread over 5 years for annual exclusion purposes.² For a grandchild named as beneficiary, this is effectively a $95K transfer to a skip person — using 5 years of annual exclusion, and therefore fully GST-exempt.

Important mechanics:

• The 5-year election must be made on Form 709 (even though no gift tax is due). Without the Form 709 election, the lump-sum contribution is treated as a single gift and $76,000 of it uses lifetime exemption.
• If the contributor dies within the 5-year spread period, the portion allocated to the remaining years returns to their estate. This is generally not a concern at normal ages, but worth noting.
• SECURE 2.0 (§ 126) allows up to $35,000 of 529 assets (subject to contribution-year limits and a 15-year account-age requirement) to be rolled into a Roth IRA for the beneficiary — adding flexibility to the exit strategy if the beneficiary doesn't pursue education.

For UHNW families with many grandchildren, superfunding all 529s in the same year can be a coordinated annual gifting event: $190,000 per grandchild, fully GST-exempt, outside the lifetime exemption.

The most expensive GST mistakes

GST errors are hard to fix after the fact. The inclusion ratio is generally locked in at the time of funding; a trust with a 1.0 inclusion ratio from a missed Form 709 may carry that status for 100 years. The most common failures:

1. Not filing Form 709. Trust funded, no gift tax return filed, no GST exemption allocated. Decades later, grandchildren receive distributions — and the trustee discovers the trust has a 1.0 inclusion ratio. Every distribution to skip persons faces 40% GST tax that could have been avoided entirely.
2. Relying on portability for GST. Surviving spouse assumes their deceased spouse's unused GST exemption carried over. It didn't. The survivor has only their own $15M GST exemption, and potentially $30M+ of assets that need protection.
3. Funding a GRAT intending GST efficiency. GRAT succeeds; $15M passes to a trust for grandchildren; the grantor must now allocate $15M of GST exemption to protect the remainder — at the post-appreciation value. The leverage that IDGTs provide simply doesn't exist in a GRAT structure.
4. Using a state with RAP for the dynasty trust. Trust drafted under California or New York law (both have RAP rules) terminates after ~90 years, forcing distribution to beneficiaries and potentially triggering GST tax on termination. Proper jurisdiction selection at drafting is unwind-proof; fixing it later requires decanting or trust reformation proceedings.
5. Missing Crummey notices. Annual exclusion gifts to a trust with Crummey powers require annual written notice to beneficiaries of their withdrawal right. If the trustee stops sending notices, the annual gift tax exclusion (and its GST exemption benefit) is lost for that year. The IRS has successfully challenged Crummey trusts where notices were not consistently maintained.
6. Inadvertent automatic allocation opt-outs. Sometimes advisors recommend electing out of automatic GST exemption allocation on Form 709 to preserve exemption for a future use — but then don't follow through with manual allocation when needed. The trust ends up with no exemption at all.

Who should be driving this

GST planning is one of the few areas where a small coordination failure between the estate attorney, the CPA, and the financial advisor can cost millions. The attorney drafts the trust and advises on structure. The CPA must file Form 709 with correct allocation amounts and elections. The financial advisor needs to know which trust gets which assets — because the GST implications vary significantly by asset type and expected return.

In practice, UHNW families with $30M–$200M often have the trust documents right but the GST allocation tracking wrong. Gift tax returns are filed by the CPA without explicit guidance from estate counsel on which trusts should receive manual allocation. The financial advisor, unaware of inclusion ratio considerations, may move assets between trusts in a way that triggers unexpected GST consequences.

Fee-only RIAs with UHNW estate coordination experience don't replace the attorney or CPA — but they serve as the connective tissue that makes sure each party knows what the other has done, and that the investment structure aligns with the estate plan. Finding a specialist who has done this across multiple UHNW clients is not the same as finding a good generalist with estate knowledge.

Sources

1. IRC Chapter 13 (§§ 2601–2664) — Generation-Skipping Transfer Tax; definitions of skip person, non-skip person, direct skip, taxable termination, taxable distribution, and inclusion ratio computation (§ 2642). Law Cornell.
2. IRS — 2026 inflation adjustments (OBBBA): estate/gift/GST exemption $15,000,000 per individual; annual gift exclusion $19,000 per recipient ($38,000 gift splitting); 529 superfunding $95,000/$190,000 per beneficiary. GST exemption not portable. Values verified May 2026.
3. IRC § 2632 — Special rules for allocation of GST exemption; automatic allocation rules for direct skips (§ 2632(b)) and trusts (§ 2632(c)); election out provisions; timing of allocation.
4. South Dakota Trust Code (Title 55) — No Rule Against Perpetuities, directed trust statute, DAPT provisions, spendthrift protection. SD is the leading dynasty trust jurisdiction for UHNW families nationally.
5. IRC § 2642 — Inclusion ratio; how GST exemption allocated at time of transfer determines the fraction of future distributions subject to GST tax; why IDGT seed-gift allocation leverages exemption vs. GRAT remainder allocation at post-appreciation values.

Tax law and GST regulations change frequently. Verify all figures and trust structure decisions with qualified estate planning counsel for the current tax year. OBBBA implementing regulations were still being issued as of May 2026; consult IRS guidance for final rules on affected provisions.