What Is the Generation-Skipping Transfer Tax and Could It Apply If I Leave Money Directly to My Grandchildren?

The GSTT only applies to transfers above a certain threshold. In 2025, the exemption is $13.99 million per person. That means you can transfer up to that amount to grandchildren or other skip persons without triggering the tax. Married couples can combine their exemptions for a total of roughly $27.98 million in tax free transfers.

The GSTT was created to prevent wealthy families from avoiding estate taxes by leaving assets directly to grandchildren instead of children. Without this tax, a family could skip one layer of estate tax entirely.

There are two ways the GSTT can apply:

• Direct skips: You give money or property directly to a grandchild (or someone 37 years younger). The tax is calculated at the time of the transfer.
• Indirect skips: You place assets in a trust that benefits both your children and grandchildren. The GSTT may apply later when distributions are made to the grandchildren or when your children's interests in the trust end.

Both types are subject to the GST tax if they exceed your available exemption.

The annual gift tax exclusion also applies to generation-skipping gifts. In 2025, you can give up to $19,000 per recipient per year without using any of your GSTT exemption. Gifts to 529 education plans can also qualify for special treatment. These annual exclusion gifts are a simple way to transfer wealth to grandchildren tax free without touching your lifetime exemption.

The GSTT is not an income tax. It is a transfer tax, meaning it applies to the act of giving or leaving assets, not to the income those assets generate. However, inherited assets like retirement accounts are still subject to income tax when distributed, regardless of whether the GSTT applies.

If your estate could be subject to the GST tax, proper planning makes a significant difference. Common strategies include dynasty trusts, annual exclusion gifting, and carefully structured trust distributions. The attorneys we work with can help you figure out the most efficient way to leave money to grandchildren without triggering unnecessary taxes.

For a broader look at how federal taxes interact with your estate plan, read our guide on trusts vs. wills. Good planning means more money stays in the family. That is the smart play.

For the full Arizona walkthrough of federal estate, gift, and GST tax planning, including portability, the lifetime exemption, and annual exclusion gifts, read our pillar guide: Estate, Gift & GST Tax in Arizona: The Complete Guide.