Generation-Skipping Trusts in 2026: How Retirees Can Pass Wealth to Grandchildren
Key Points
The generation-skipping trust (GST) is a great tool in many cases for grandparents to transfer wealth to their grandkids.
Advantages of GSTs include avoiding double taxation and shielding assets from creditors and lawsuits.
Setting up a GST, however, requires careful planning.
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Grandparents and their grandchildren often have special bonds. However, another "family member" -- Uncle Sam -- likes to get heavily involved when grandparents want to transfer their wealth to the grandkids.
The generation-skipping transfer tax (GSTT) is a federal tax on transfers of assets to anyone more than one generation below the person making the transfer. The IRS definition of one generation below is when the beneficiary is more than 37.5 years younger than the transferor. The GSTT matches the highest federal gift and estate tax rate at the time of the transfer -- 20% in 2026. And it comes on top of any other applicable federal gift or estate taxes.
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How can retirees pass wealth to their grandchildren and minimize the taxes owed? The generation-skipping trust (GST) is a great tool in many cases.
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Advantages of a generation-skipping trust
Generation-skipping trusts offer several advantages for wealthy retirees, including:
- Avoids double taxation. If you transfer assets to your children, they must pay taxes. When your children transfer assets to their children (your grandchildren), taxes must be paid again. A GST eliminates one of these taxation steps.
- Shields assets. Once your assets are put into a GST, they're shielded from creditors, divorce settlements, and lawsuits.
- Allows some control over assets. GSTs allow you to establish detailed terms for how the assets are handled and distributed. You can choose to limit distributions to approved purposes, including education, healthcare, or home purchases, if you like.
- Doesn't leave out your children completely. While GSTs are designed to skip a generation in transferring wealth, your children can still benefit. You can set up the trust to distribute income to your children. However, the principal must be untouched to be used for your grandkids. Also, GSTs can help your children because the assets in the GST can't be included in their estates.
Complicated but powerful
GSTs are complicated. Setting up these trusts requires careful planning and can incur hefty legal fees. It's best to work with estate planning professionals to structure the GST in a way that works best for you and your heirs.
These trusts don't always eliminate taxes. If your estate is especially large (over the $11.7 million exemption for 2026), generation-skipping taxes will still apply. Also, GSTs are irrevocable trusts. You can't change the trust or revoke it once it's set up.
Despite their complexity, though, GSTs are a powerful tool for leaving a financial legacy to your grandchildren or great-grandchildren.
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