What the Generation-Skipping Transfer Tax Is

The generation-skipping transfer tax is a federal tax that applies when you give money or property to someone two or more generations younger than you—typically a grandchild, great-grandchild, or grandniece or nephew—either during your lifetime or through your will. The IRS treats these transfers differently from ordinary gifts or inheritances because they skip over a generation that would normally pay tax.

The tax exists because without it, wealthy families could avoid estate and gift taxes by passing assets directly to grandchildren instead of to their children first. The generation-skipping transfer tax closes that loophole by imposing an additional tax on top of any gift or estate tax that might already explore.

You do not automatically owe this tax on every gift to a grandchild. The IRS allows each person a lifetime exemption—a total dollar amount you can transfer to skip-generation beneficiaries without owing the tax. For 2024, that exemption is $13.61 million per person. Once you exceed that amount, transfers are taxed at the highest federal estate tax rate, which is currently 40 percent.

Key Takeaways

  • The generation-skipping transfer tax applies to gifts or inheritances that skip a generation—for example, from a grandparent directly to a grandchild.
  • Each person has a lifetime exemption of $13.61 million (as of 2024) before the tax kicks in; amounts above that are taxed at 40 percent.
  • The exemption amount changes yearly and is set to drop significantly after 2025 unless Congress extends current tax law.
  • Proper planning with a will or trust can help you use your exemption efficiently and avoid unexpected taxes on your family's inheritance.
  • You must file a special form (Form 709) to report generation-skipping transfers and claim your exemption.

Who Counts as a Skip-Generation Beneficiary

A skip-generation beneficiary is anyone who is two or more generations below you in the family tree. The most common examples are grandchildren and great-grandchildren. However, the IRS definition is not strictly biological—it also includes grandnieces and nephews, and even unrelated people who are more than 37.5 years younger than you.

Your own children do not count as skip-generation beneficiaries, even if you leave them money in your will. Gifts or bequests to children are subject to the regular gift and estate tax rules, not the generation-skipping transfer tax. The same applies to spouses—transfers to a spouse are never subject to generation-skipping transfer tax because spouses are in the same generation.

If you leave money to a trust that benefits both your children and grandchildren, the situation becomes more complex. The IRS looks at who actually receives the money and when. A trust that pays income to your child during their lifetime and then passes the principal to grandchildren may trigger generation-skipping transfer tax on the principal when it passes to the grandchildren.

How the Exemption Works

Every person receives a single lifetime exemption that applies to all generation-skipping transfers they make, whether during life or after death. You do not have to use it all at once. You can make small gifts to grandchildren over many years, keeping track of how much of your exemption you have used, until you reach the limit.

The exemption amount is tied to inflation and changes each year. In 2024, it is $13.61 million. This means you can transfer up to that amount to skip-generation beneficiaries without owing the generation-skipping transfer tax. If you are married, your spouse has a separate exemption of the same amount, so a married couple can transfer $27.22 million combined before the tax applies.

Once you exceed your exemption, every dollar above it is taxed at 40 percent. This is a steep rate, which is why planning matters. If you have a large estate and expect to leave money to grandchildren, you may want to work with an estate planning attorney to make sure your exemption is used efficiently and that your family does not lose a large portion of the inheritance to taxes.

What Happens After 2025

The current exemption amount is scheduled to change significantly after December 31, 2025. Under current federal tax law, the exemption is set to drop to approximately $7 million per person (adjusted for inflation) starting in 2026. This means that if you have a large estate and plan to leave money to grandchildren, the timing of your transfer matters.

Congress could extend the higher exemption amount, but that would require new legislation. Many families with substantial assets are reviewing their plans now to decide whether to make large gifts to grandchildren before the exemption drops, or to wait and see whether the law changes. This is a decision that depends on your specific situation and should be discussed with an estate planning professional.

How Transfers Trigger the Tax

A generation-skipping transfer can happen in three ways: a direct gift from you to a grandchild during your lifetime, a bequest in your will to a grandchild, or a transfer through a trust that is designed to benefit grandchildren. Each type is treated the same way for tax purposes—the value of what is transferred counts against your exemption.

The tax is calculated based on the fair market value of the property at the time of the transfer. If you give a grandchild $50,000 in cash, that $50,000 counts against your exemption. If you leave a piece of real estate worth $200,000 to a grandchild in your will, that $200,000 counts against your exemption. If you have already used part of your exemption on earlier gifts, the remaining exemption is what is available for later transfers.

Gifts to grandchildren that are small enough to fall within the annual gift tax exclusion—$18,000 per person in 2024—do not count against your generation-skipping transfer exemption. However, they still count as generation-skipping transfers for reporting purposes, and you must file the proper forms to document them.

Filing and Reporting Requirements

If you make a generation-skipping transfer, you must report it to the IRS using Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form is filed with your annual income tax return and tells the IRS how much of your lifetime exemption you are using.

You must file Form 709 even if you do not owe any tax, because the form is how you claim your exemption. If you do not file the form and report the transfer, you may lose the ability to claim the exemption later, and the IRS could assess the full 40 percent tax on the transfer. This is why it is important to keep records of all gifts to grandchildren and to file the proper paperwork.

If a transfer happens through your will or a trust after you die, your executor or trustee is responsible for filing the necessary forms and reporting the transfer. This is another reason to have a clear, well-drafted will or trust document—it makes it easier for your executor to understand what transfers are generation-skipping transfers and to report them correctly.

When You Might Need Professional Help

If your estate is small—under $1 million—you probably do not need to worry about generation-skipping transfer tax. Your exemption is large enough that you can leave money to grandchildren without triggering the tax. However, if you have a larger estate, or if you plan to make substantial gifts to grandchildren during your lifetime, it is worth talking to an estate planning attorney or tax professional.

An attorney can help you structure gifts or bequests in a way that uses your exemption efficiently and minimizes taxes for your family. They can also help you set up trusts that benefit grandchildren while managing the generation-skipping transfer tax implications. This kind of planning is especially important if you are married and want to coordinate your exemptions, or if you have a blended family with step-grandchildren.

Frequently Asked Questions

Do I owe generation-skipping transfer tax on every gift to a grandchild?

No. You have a lifetime exemption of $13.61 million (as of 2024). Gifts and bequests up to that amount are not subject to the tax. Only transfers above your exemption are taxed. Additionally, gifts that fall within the annual gift tax exclusion ($18,000 in 2024) do not count against your exemption, though they must still be reported.

What is the difference between generation-skipping transfer tax and estate tax?

Estate tax applies to the total value of your estate when you die, regardless of who inherits it. Generation-skipping transfer tax applies specifically to transfers that skip a generation. You could owe both taxes on the same transfer if your estate is large enough and you leave money to a grandchild. They are separate taxes with separate exemptions.

If I give my grandchild money during my lifetime, do I have to pay tax right away?

Not necessarily. The tax is not due until you exceed your lifetime exemption. When you make the gift, you file Form 709 to report it and claim your exemption. If the gift is within your exemption, no tax is due. If it exceeds your exemption, the tax would be due with your tax return.

Can I split my exemption between my children and grandchildren?

Your generation-skipping transfer exemption applies only to skip-generation beneficiaries (grandchildren and younger). Gifts to your children are not generation-skipping transfers and do not use this exemption. You have a separate gift and estate tax exemption that applies to all beneficiaries, including children.

What should I do before the exemption drops in 2026?

If you have a large estate and want to leave money to grandchildren, review your plan with an estate planning attorney. They can help you decide whether making gifts now—while the exemption is higher—makes sense for your situation, or whether other strategies might work better. Do not make large gifts without understanding the tax and legal implications.