How does the generation-skipping transfer tax work?

The short answer

The GST tax is a US federal tax that applies in addition to (not instead of) gift or estate tax when a transfer skips a generation. Without it, wealthy families could transfer assets directly grandparent-to-grandchild, bypassing the parent’s estate-tax layer entirely.

The structure is dollar-for-dollar punitive when triggered: the GST tax effectively replicates the estate tax that would have applied if the transfer had passed through the intermediate generation. The 40% flat rate above the exemption mirrors the federal estate-tax rate.

OBBBA’s permanence at $15 million per person from 1/1/2026 mirrors the estate exemption, allowing substantial generation-skipping transfers within the exemption envelope. Above the exemption, the combined estate-plus-GST tax effectively eliminates most of the tax-savings rationale for direct skip transfers.

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What the data shows

Sources: IRS, Treasury Department, French DGFiP (2024-2026):

• US GST exemption from 1/1/2026: $15 million per individual / $30 million per couple (OBBBA, aligned with estate exemption)
• US GST tax rate above exemption: 40% flat
• US GST exemption history: $5.43M (2015) → $11.7M (2021) → $13.61M (2024) → $15M (2026)
• France grandparent-to-grandchild abatement: 1,594€ (article 779 II CGI)
• France parent-to-child abatement: 100,000€ (article 779 I CGI, frozen since 2011)
• France assurance-vie article 990I: 152,500€ per beneficiary regardless of relationship — circumvents the small grandparent-grandchild abatement

The exception that nuances the picture: the US GST tax does not apply to “qualified” generation-skipping transfers under specific exceptions, including direct payments of medical or educational expenses for a beneficiary (regardless of generation) and the annual exclusion gifts ($19,000 per person in 2025, indexed annually). These exclusions allow modest cross-generational support without GST consequence.

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Why it happens — the macro mechanism

Three structural channels explain the design and economic effect of GST taxation.

Channel 1 — The wealth-transmission tax-base preservation problem. Without a GST equivalent, wealthy families could systematically transfer assets directly to grandchildren or more remote descendants, eliminating one or more layers of transfer tax that would have applied under successive generation-by-generation transmission. The US Congress added the GST tax to the Internal Revenue Code in 1976 (extensively reformed in 1986) specifically to close this base-erosion channel.

Channel 2 — The exemption-allocation strategy. The $15M GST exemption can be allocated to generation-skipping transfers, effectively allowing dynasty trusts to be funded with up to $15M per grantor (or $30M per couple) and then to compound across multiple generations free of additional transfer tax. The structural insight is that allocating GST exemption to a long-duration trust creates a permanent tax shelter — the trust assets, however much they grow, are not subject to GST when distributed to skip beneficiaries provided the original allocation was sufficient.

Channel 3 — The French parallel via abatement asymmetry. France has no formal GST tax, but its abatement structure creates a similar economic effect. The grandparent-to-grandchild abatement is only 1,594€ per grandparent per grandchild, vs 100,000€ parent-to-child. This 60-fold asymmetry penalizes generation-skipping transfers that exceed the small abatement, applying the standard direct-line schedule (5-45%) to almost the full transfer value. The functional equivalent of the US GST tax is therefore embedded in French law through abatement design rather than a separate tax.

Synthesis by jurisdiction: the US uses a separate parallel tax structure (GST tax with separate exemption) achieving the base-preservation objective explicitly; France achieves a similar economic outcome through abatement asymmetry within the standard succession schedule; both systems independently arrive at the conclusion that wealth-transfer taxation should not be easily avoidable through generation-skipping, despite very different statutory architecture.

The GST tax exists because tax authorities long ago concluded that letting wealth jump generations without consequence would systematically erode the transfer-tax base — and both common-law and civil-law systems have arrived at the same answer through different mechanisms.

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What it means for different economic actors

US high-net-worth families with grandchildren beneficiaries. The $15M GST exemption (or $30M per couple) allows substantial direct-skip planning within the envelope. Dynasty trusts allocated GST exemption can sustain wealth across multiple generations free of additional transfer tax, an unusually durable planning structure.

US families with cross-state planning. Some states impose their own succession or inheritance taxes that may treat skip transfers differently from the federal GST regime. Coordinating federal and state planning becomes material when state-level exemptions are well below the federal $15M.

French families with grandchildren transmissions. The 1,594€ grandparent-to-grandchild abatement creates significant exposure for transfers above this small threshold. Assurance-vie clause bénéficiaire (152,500€ per beneficiary under article 990I, regardless of relationship) becomes a primary tool to circumvent the asymmetry, allowing material grandchild transfers within the dedicated exemption.

A common error is to assume generation-skipping is always tax-disadvantaged. Within US GST exemption (post-OBBBA $15M) or within French assurance-vie envelope (152,500€ per beneficiary), generation-skipping is structurally efficient because the assets compound across generations free of additional transfer tax.

Practical observation

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Related questions

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Frequently asked questions

Why does the GST tax exist if estate tax already applies?

Without GST, wealthy families could transfer assets directly grandparent-to-grandchild, bypassing the parent’s estate-tax layer entirely. Over multiple generations, this would systematically erode the federal transfer-tax base — a single fortune that would normally be taxed at three transmission events (great-grandparent → grandparent → parent → child) could be taxed at only one (great-grandparent → child). The GST tax was added to the Internal Revenue Code specifically to prevent this base erosion. The 40% rate matches the estate-tax rate, mirroring what would have applied at each skipped transmission.

How does France achieve a similar effect without a formal GST tax?

France’s tax code does not include a separate GST tax, but the abatement structure produces a similar economic outcome. The parent-to-child abatement is 100,000€; the grandparent-to-grandchild abatement is only 1,594€. This 60-fold asymmetry means generation-skipping transfers above 1,594€ apply the standard 5-45% direct-line schedule to almost the full value, effectively replicating the layer of tax that would have applied through parent-to-child transmission. The functional equivalent is therefore embedded in the abatement design rather than a separate tax.

Are dynasty trusts still attractive given the high GST exemption?

The post-OBBBA $15M GST exemption (or $30M per couple) supports substantial dynasty trust funding. Once allocated GST exemption, a dynasty trust’s appreciation compounds across multiple generations free of additional transfer tax. State-level Rule Against Perpetuities reform in 30+ US states allows perpetual or very long-duration trusts. The structure remains attractive for true HNW families seeking multi-generational wealth preservation. The OBBBA permanence eliminates the rush-to-fund incentive that the prior 2026 sunset created, but the underlying planning architecture remains intact.

Last updated — 4 June 2026