A Generation-Skipping Trust (GST) is a powerful estate planning tool for preserving generational wealth and managing taxable estates. Simply put, a GST enables someone (the trust grantor) to pass on assets indirectly to their grandchildren—instead of directly to their children—to avoid certain estate taxes that might otherwise be owed when each generation inherits. Hence, the very creative name, Generation-Skipping Trust… By skipping the children’s taxable estate, the trust avoids a potential layer of estate tax, which can make a significant difference for high-net-worth families.
When To Use It and Why?
A GST is most useful when the grantor’s children are likely to have a taxable estate of their own. Under the One Big Beautiful Bill Act (OBBBA), the federal estate tax exemption is high, only applying to taxable estates that exceed $15 million (2026) per individual for single taxpayers and $30 million for married couples who structure their estate plan properly.
It is important to remember:
- A grantor uses both their estate tax exemption and their generation-skipping exemption when funding a GST.
- The GST exemption equals the lifetime gift and estate tax exemption and is adjusted for inflation each year.
- Any assets above these exemption amounts are taxed at 40%.
Because of these high thresholds, GSTs are typically relevant for families with substantial wealth. By having assets pass directly to the grandchild, the trust avoids being taxed again as part of the child’s taxable estate. Over time, that can help preserve significant after-tax dollars—including the growth on the trust assets. Any growth on the GST assets after they are distributed to the beneficiaries is not subject to GSTT (Generation-Skipping Transfer Tax).
For families who do have taxable estate, a GST can help avoid a double layer of taxes:
- First tax: When the grantor passes away.
- Second tax: When the grantor’s Child later passes away with a presumed taxable estate.
How Does It Work?
Let’s imagine a scenario with a Decedent, Child, and Grandchild.
1. The Decedent leaves $15 million to a GST. The trust is written so the Grandchild is the ultimate beneficiary, making the Child the “skipped” generation (or skip person).
2. Does the Child then get nothing? Not at all. The Child typically receives income from the trust, but the trust assets themselves won’t be included in the Child’s estate. The GST may even give the Child limited powers over the assets — they just can’t be broad enough to count as full ownership.
- Note there can be flexibility with the distribution of income. The trustee may distribute income primarily to the Child, but sometimes the trust allows income to be “sprinkled” among the Grandchildren as well to help manage the family’s overall income tax burden.
3. When the Child passes away, the trust assets are transferred to the Grandchild — without being pulled into the Child’s taxable estate.
A Generation-Skipping Trust may not be the right fit for every estate, but for families with substantial assets, it can be a powerful estate planning tool to protect and intentionally preserve wealth. The real value lies in planning ahead — taking control of how your legacy supports your children, grandchildren, and beyond. With a well-crafted GST and the right planning team, you can create impact that lasts far longer than a single lifetime. If you have questions, please reach out to your Apella financial planner to review how a GST might be a good estate planning tool for your situation.
Disclosures:
Apella Capital, LLC (“Apella”), DBA Apella Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Apella Wealth provides this communication as a matter of general information. Any data or statistics quoted are from sources believed to be reliable but cannot be guaranteed or warranted.
