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Uncover the nuances of the Generation-Skipping Transfer (GST) tax and how strategic planning can preserve your assets for your beneficiaries
September is often recognized as Grandparents Month. As we honor the special role grandparents play in our families, many of you may be thinking about your legacy and how best to provide for your children and grandchildren. If you are considering making gifts to your grandchildren or setting up trusts for their benefit, it’s important to understand a unique tax that could affect your plans: the Generation-Skipping Transfer (GST) tax. In this blog, we will shine a light on the GST tax and how to protect your family’s legacy.
GST tax overview
The GST tax is designed to prevent you from avoiding estate and gift taxes by making gifts that “skip” a generation; therefore, GST tax planning should be considered if you are transferring wealth to or for the benefit of grandchildren or other individuals who are more than one generation younger than you (“skip persons”). Just like estate and gift taxes, the GST tax has its own exemption. For 2025, you can transfer up to $13.99 million during your lifetime or at death to skip persons or trusts for their benefit without paying GST tax. In 2026, this exemption increases to $15 million. Any amount you transfer to skip persons above this exemption is taxed at a 40% rate.
Using the GST exemption
You can use your GST exemption by making direct gifts to your grandchildren or by setting up a trust for their benefit. If you create a trust and allocate your GST exemption to it, the assets in that trust may benefit many generations — even those into the future — without incurring GST tax. For that reason, GST-exempt trusts are a powerful tool for building a lasting family legacy.
Administrative matters
Allocating your GST exemption can be done by filing a gift tax return. Even if you don’t file a gift tax return, there are automatic allocation rules that may apply to transfers in trust that benefit your grandchildren. However, you can opt out of these automatic rules if you wish on a gift tax return. Any unused GST exemption can be allocated on an estate tax return at your death. Because the rules can be complex and the consequences may not arise until many years later, it’s crucial to keep detailed records of all gifts and allocations of exemption.
What if a trust is not GST exempt?
It could be that a trust you create is not GST exempt, either because you don’t allocate GST exemption or you don’t have enough GST exemption to allocate to the trust. If a trust is not GST exempt, GST tax is generally due when all non-skip beneficiaries (like your children) have passed away or when distributions are made to skip persons (like your grandchildren).
Conclusion
Grandparents Month is a wonderful time to reflect on the impact you have on your family’s future. If you are contemplating gifts to your grandchildren or to trusts for their benefit, talk to your estate planning attorney about the GST tax and how to make the most of your exemption. With the right strategy in place, you can celebrate your role as a grandparent by creating an enduring, tax-efficient legacy.
For more information on transfer taxes, including the GST tax, click here or reach out to your CIBC advisor.
Leslie Kehoe is a senior wealth strategist for CIBC Private Wealth Management in Atlanta with 25 years of industry experience. In this role, Leslie is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.
