Generation-Skipping Trust (GST) Calculator

The effectiveness of a Generation-Skipping Trust hinges on understanding the key federal limits and tax rates. These thresholds determine how much wealth can be transferred tax-efficiently. The most critical factor is the lifetime GST exemption, which is unified with the federal estate and gift tax exemptions.

The 2026 Sunset Provision: A Critical Planning Deadline

The Tax Cuts and Jobs Act of 2017 nearly doubled the federal estate, gift, and GST tax exemptions. However, this provision is temporary. On January 1, 2026, the exemption amount is scheduled to revert to its pre-2018 level, adjusted for inflation—estimated to be around $7 million.

This "sunset" makes proactive planning essential. By funding a GST with assets up to the current ~$13.99 million exemption before the law changes, you can lock in the higher exemption amount permanently for that trust, regardless of future changes in the law. This is a "use it or lose it" opportunity for significant multi-generational wealth transfer.

The primary benefit of a Generation-Skipping Trust isn't just avoiding a one-time tax; it's the power of tax-free compounding across multiple generations. When you contribute assets to a GST and allocate your lifetime exemption to those contributions, you are not just shielding the initial principal. You are shielding all future appreciation and growth on those assets from the GST tax forever.

Consider this simplified scenario:

• Initial Contribution: You transfer $5 million of stock into a GST for your newborn grandchild and allocate $5 million of your lifetime exemption to the trust.
• Growth Over Time: The trust is invested and grows at an average of 7% per year.
• Value at Distribution: By the time your grandchild is 40, the trust assets have grown to over $75 million.

Because you allocated your exemption to the initial $5 million, the entire $75 million is now exempt from the GST tax. When the trust distributes that money to your grandchild, it passes free of the 40% GST tax. Without the trust, transferring that wealth could have triggered millions in estate or GST taxes. This powerful feature allows a single exemption allocation to protect an exponentially larger amount of wealth over time. This makes it a cornerstone of planning for your long-term retirement needs and legacy goals.

This strategy also bypasses estate taxes at your children's level. Assets in a properly structured GST are not considered part of your child's estate when they pass away, preventing a second layer of estate tax before the wealth reaches your grandchildren. This ensures a more direct and tax-efficient transfer down the family line, a key component of any strategy to reduce taxes on retirement distributions and transfers.

The Generation-Skipping Transfer Tax applies when a "taxable event" occurs. The calculator primarily models a taxable distribution or termination, but it's helpful to understand the different ways wealth can be transferred to a "skip person" (e.g., a grandchild or anyone 37.5 years younger who is not a spouse).

1. Direct Skip: This is the simplest type of transfer. It's an outright gift or bequest made directly to a skip person. For example, writing a $1 million check to your grandchild is a direct skip. The GST tax, if any is due, must be paid by the donor at the time of the gift.

2. Taxable Termination: This event occurs within a trust structure. Imagine a trust that provides income to your child (the non-skip person) for their lifetime. Upon your child's death, the remaining trust assets are distributed to your grandchild (the skip person). The "termination" of your child's interest in the trust is the taxable event. The tax is paid by the trustee from the trust's assets.

3. Taxable Distribution: This also occurs within a trust. It is any distribution of trust income or principal to a skip person that is not a taxable termination or a direct skip. For example, if a trustee distributes $100,000 from the trust to your grandchild for a down payment on a house while your child is still alive and a beneficiary, that distribution is a taxable event. The tax is paid by the beneficiary (the grandchild).

This calculator focuses on what happens at the point of a taxable distribution or termination, showing how prior exemption allocation can eliminate the tax burden. Understanding these events is crucial when working with an attorney to draft a trust that aligns with your family's specific needs and timeline. You can model various scenarios to see how long your money might last under different tax assumptions using a how long will my money last calculator.

The calculator determines the tax efficiency of your trust by projecting its growth and applying federal tax rules at the time of a future distribution. The core calculations focus on separating the trust into exempt and non-exempt portions.

The first step is to calculate the Inclusion Ratio, which represents the portion of the trust that is subject to GST tax.

Inclusion Ratio = Total Non-Exempt Contributions / Total Contributions

Where:

• Total Non-Exempt Contributions = The amount of contributions made to the trust that exceeds your available GST exemption.
• Total Contributions = The total initial and annual contributions you make to the trust.

Next, the calculator determines the GST Taxable Amount at the time of distribution. This is the non-exempt portion of the trust's value.

GST Taxable Amount = Non-Exempt Balance at Distribution × (Distribution Percentage / 100)

Where:

• Non-Exempt Balance at Distribution = The portion of the trust's total value that grew from non-exempt contributions.
• Distribution Percentage = The percentage of the trust's value being distributed to the beneficiary.

Finally, the Projected GST Tax is calculated by applying the federal rate to the taxable amount.

Projected GST Tax = GST Taxable Amount × (GST Tax Rate / 100)

Where:

• GST Tax Rate = The flat federal tax rate for generation-skipping transfers, currently 40%.

The net result is the amount your beneficiary receives after taxes are paid. This highlights the immense value of maximizing your GST exemption to keep the Inclusion Ratio at zero.

What exactly is a Generation-Skipping Trust (GST)?

A Generation-Skipping Trust is an irrevocable legal arrangement used to hold and manage assets for the benefit of beneficiaries who are at least two generations younger than the grantor (the person creating the trust). Its primary purpose is to minimize federal transfer taxes—specifically the Generation-Skipping Transfer (GST) tax—on wealth passed to grandchildren or more remote descendants.

What is the GST tax exemption amount for 2026?

For 2026, the federal GST tax exemption is projected to be approximately $13.99 million per individual. This amount is indexed for inflation annually. It's crucial to be aware of the "sunset provision," which is set to cut this exemption by about half on January 1, 2026, unless Congress acts to change the law.

How is a GST different from a direct gift or inheritance?

A direct gift or inheritance to a grandchild is a "direct skip" and immediately uses your GST exemption or triggers GST tax. A GST, by contrast, is a vehicle that allows assets to grow over a long period. The exemption you apply to the initial contribution also covers all future growth, potentially shielding a much larger sum from tax than a simple gift would. It also provides asset protection and controlled distributions. You can compare strategies with a retirement goal calculator.

Is the growth inside a GST tax-free?

No, the trust itself is not income-tax-free. The trust is a separate taxable entity and must pay income tax on any interest, dividends, and capital gains it earns and does not distribute. The "tax-free" benefit of a GST refers specifically to its exemption from the 40% federal Generation-Skipping Transfer tax upon distribution to a skip person.

Who is considered a "skip person"?

A "skip person" is any beneficiary who is two or more generations below the grantor. This most commonly refers to a grandchild. It can also refer to a non-relative who is at least 37.5 years younger than the grantor. Your own children and their spouses are considered "non-skip persons."

Can I use my GST exemption for multiple trusts or gifts?

Yes, the GST exemption is a lifetime amount that you can allocate as you see fit. You can use it to cover a single large transfer to one trust, or you can spread it across multiple trusts, direct gifts to grandchildren, and other generation-skipping transfers over your lifetime. An advisor can help track your allocations.

What happens if I don't use my full GST exemption before I die?

Any unused GST exemption at the time of your death can be allocated on your estate tax return to bequests you make to skip persons or trusts. However, you will have lost the opportunity for those assets to grow inside the trust, free from GST tax, during your lifetime. To maximize the benefit, especially with the 2026 sunset approaching, many planners advise using the exemption on lifetime gifts.

This calculator provides a powerful projection of how a Generation-Skipping Trust can enhance your legacy. Use these results as a starting point for a deeper conversation with your financial advisor and estate planning attorney.

To further refine your plan, consider using our Estate Tax Calculator to see how a GST fits into your overall estate. You can also explore alternatives like a Charitable Remainder Trust Calculator for philanthropic goals. Finally, assess the impact of these large transfers on your own financial security with the Retirement Withdrawal Calculator.

Last updated: July 2026