Generation-Skipping Tax Exemption: Amount, Allocation, and Deadlines

The generation-skipping tax exemption lets you move up to $15 million to grandchildren or later generations in 2026 without paying the 40% federal generation-skipping transfer (GST) tax. Married couples can shield up to $30 million combined, but only if each spouse’s exemption is actually used. The exemption isn’t automatic in every situation, it isn’t portable between spouses, and a missed filing deadline can cost you real dollars of exemption. Here is what the number covers, how to claim it, and where families most often lose ground.

How Much You Can Transfer in 2026

Every individual has a GST exemption of $15 million in 2026.¹ The exemption is unified with the federal estate and gift tax exemption, so the same $15 million is shared across all three transfer taxes. Every dollar you use during life to shelter a lifetime gift is a dollar unavailable at death for your estate.²

The $15 million figure is now permanent. The One Big Beautiful Bill Act, signed July 4, 2025, removed the sunset that would have cut the exemption roughly in half after 2025. Beginning in 2027, the exemption will be adjusted annually for inflation.¹

The GST tax rate itself is flat: 40%, equal to the top federal estate tax rate.³ Anything above your exemption gets hit at that rate, on top of any estate or gift tax that also applies to the same transfer.

Who Counts as a Skip Person

The exemption only matters for transfers to a “skip person”: someone two or more generations below you. Grandchildren are skip persons. Great-grandchildren are skip persons. Children are not. For relatives, generation assignment tracks the family tree. For anyone unrelated to you, the rule is age-based: a person born more than 37½ years after you is a skip person.⁴

One important exception: if your child has already died, that child’s descendants move up a generation. Grandchildren whose parent (your child) predeceased you are treated as belonging to their parent’s generation, so transfers to them are not generation-skipping and no GST tax applies.⁴

The Three Transfers the Tax Hits

The GST tax can be triggered three different ways, and your exemption can be applied against any of them:⁵

A direct skip, meaning an outright transfer to a skip person or to a trust whose only beneficiaries are skip persons. The transferor pays the tax.
A taxable termination, meaning the last non-skip person’s interest in a trust ends and only skip persons remain. The trust pays the tax.
A taxable distribution, meaning the trust distributes to a skip person while non-skip persons still have interests. The recipient pays the tax.

Married Couples: The Exemption Is Not Portable

This is the trap that costs families the most. The estate tax exemption is portable, so a surviving spouse can inherit any exemption the first spouse to die didn’t use. The GST exemption is not. Whatever GST exemption a spouse fails to use during life or at death is gone.⁶

For a couple with $30 million intended for grandchildren, letting one spouse’s exemption expire unused effectively cuts the family’s GST-free capacity in half. Planners commonly address this by having both spouses fund separate trusts during life, or by using a reverse QTIP election so that the first spouse to die is treated as the transferor of a marital trust for GST purposes even though the trust qualifies for the marital deduction.⁷

How the Exemption Gets Allocated

You don’t get the benefit of the exemption just by making a transfer. It has to be allocated to that specific transfer or trust. Sometimes this happens automatically. Sometimes you have to elect it on a gift tax return. And sometimes you have to actively opt out.

Automatic Allocation

For direct skips, the exemption is automatically applied to the transfer unless you affirmatively elect out. You might elect out when the transfer is small and you’d rather save exemption for a larger gift later.

Transfers to a “GST trust,” broadly any trust that could eventually benefit skip persons, also receive automatic allocation. This default exists because forgetting to allocate exemption to a trust is one of the most expensive mistakes in transfer tax planning. Opting out requires a timely filed gift tax return.⁸

Elective Allocation on Form 709

For everything else, you allocate GST exemption on Form 709, the federal gift tax return, due April 15 of the year following the gift.⁹ Timely allocation locks the exemption in at the property’s fair market value on the date of the transfer. If you gift $2 million in assets in March and they grow to $3 million by April, you still only need $2 million of exemption to cover the gift completely.

At death, the executor allocates any remaining GST exemption on Form 706, the estate tax return, and can also make late allocations for lifetime transfers the decedent never covered.⁸

The Cost of Missing the Deadline

Late allocation is possible, but the property gets valued as of the date of the late allocation, not the original transfer date. A trust funded with $2 million that has grown to $5 million by the time you allocate now needs $5 million of exemption to fully shelter it. That’s $3 million of exemption consumed by delay.

Relief When You Simply Forgot

If the allocation was missed by mistake, the IRS provides relief under Section 2642(g). You have to show you acted reasonably and in good faith and that relief won’t prejudice the government. The IRS looks at whether contemporaneous documents show intent to allocate, whether a qualified tax advisor was involved, and whether you appear to be cherry-picking with hindsight, allocating only to the trusts that appreciated most.¹⁰

There is also an automatic six-month extension if you filed the return on time but simply forgot to include the allocation. File a supplemental return within six months, mark it as filed pursuant to the relief regulation, and no user fee applies. Beyond that window, you’re looking at a private letter ruling request, complete with affidavits and a filing fee.¹⁰

Transfers That Don’t Use Any Exemption

Some transfers to grandchildren pass without touching your $15 million. Direct-skip gifts that qualify for the annual gift tax exclusion, $19,000 per recipient in 2026, are automatically treated as having a zero inclusion ratio.¹ You can give $19,000 a year to each grandchild with no GST tax and no exemption used.

Payments made directly to an educational institution for tuition or to a medical provider for someone’s care are excluded from both the gift tax and the GST tax, with no dollar cap.

A caution for trusts: annual exclusion gifts to a trust only get the automatic zero inclusion ratio if the trust can benefit just one grandchild during their lifetime and, if that grandchild dies before the trust terminates, the remaining assets are included in the grandchild’s estate. Trusts benefiting multiple grandchildren, or giving the trustee discretion among several beneficiaries, don’t qualify, and gifts to them will consume GST exemption.¹¹

Why Zero Inclusion Ratio Is the Goal

Whether a specific trust or transfer is protected by your exemption is measured by its “inclusion ratio.” Divide the exemption you allocated by the value of the property transferred; that’s the applicable fraction. One minus that fraction is the inclusion ratio. The GST tax on any future transfer from that property equals 40% times the inclusion ratio.¹²

Three outcomes are possible. A ratio of zero means you allocated enough exemption to cover the full value, and every future distribution to skip persons, including all future appreciation, is GST-free. A ratio of one means no exemption was allocated and the full 40% applies. A fractional ratio means the trust is part-exempt, part-taxable, which complicates every distribution for the life of the trust.

The practical goal for any trust intended to serve grandchildren or later generations is a zero inclusion ratio. Because the ratio locks in at allocation, a trust funded with $5 million that grows to $50 million over decades passes all $50 million to skip persons without GST tax. That is why exemption is typically directed to trusts holding the assets most likely to appreciate. When a trust ends up with a fractional ratio, a qualified severance can split it into a fully exempt trust and a fully taxable trust, keeping the exempt portion clean.¹³

The ETIP Timing Trap

If you transfer property to a trust but keep an interest that would pull the property back into your estate if you died immediately, your GST exemption cannot be effectively allocated until that retained interest ends. This delay is called the estate tax inclusion period (ETIP). The ETIP closes at the earliest of three points: the property would no longer be includible in your estate, a generation-skipping transfer of the property occurs, or you die.¹⁴

The catch is valuation. When the ETIP ends, the property is valued at that point for the inclusion ratio, not at the original transfer. Transfer $3 million to a retained-interest trust, watch it grow to $8 million by the time the ETIP closes, and you now need $8 million of exemption to reach a zero ratio. Anyone using a grantor retained annuity trust or similar structure has to plan for this delayed valuation.¹⁴

Filing Deadlines and Penalties

When a taxable distribution occurs, the recipient reports it on Form 706-GS(D), due April 15 of the year following the distribution.¹⁵ An automatic six-month extension is available for filing but not for paying; tax owed is still due on the original date.¹⁶

Missing a payment triggers a failure-to-pay penalty of 0.5% of unpaid tax per month, capped at 25%, plus interest from the original due date. If the IRS issues a notice of intent to levy and payment isn’t made within 10 days, the monthly rate rises to 1%.¹⁷ At a 40% rate on transfers that often run into the millions, months of penalties and interest add up fast. Getting the allocation right at the front end is far cheaper than repairing it later.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
3
eCFR. 26 CFR 26.2641-1 – Applicable Rate of Tax
4
Office of the Law Revision Counsel. 26 USC 2651 – Generation Assignment
5
eCFR. 26 CFR 26.2612-1 – Definitions
6
Congress.gov. The Generation-Skipping Transfer Tax (GSTT)
7
eCFR. 26 CFR 26.2652-2 – Special Election for Qualified Terminable Interest Property
8
Office of the Law Revision Counsel. 26 USC 2632 – Special Rules for Allocation of GST Exemption
9
Internal Revenue Service. Instructions for Form 709 (2025)
10
Federal Register. Relief Provisions Respecting Timely Allocation of GST Exemption and Certain GST Elections
11
Office of the Law Revision Counsel. 26 USC 2642 – Inclusion Ratio – Section 2642(c)
12
Office of the Law Revision Counsel. 26 USC 2642 – Inclusion Ratio
13
eCFR. 26 CFR 26.2642-6 – Qualified Severance
14
Internal Revenue Service. Instructions for Form 706-GS(T) (12/2025)
15
Internal Revenue Service. Instructions for Form 706-GS(D)
16
eCFR. 26 CFR 26.6081-1 – Automatic Extension of Time for Filing Generation-Skipping Transfer Tax Returns
17
Internal Revenue Service. Failure to Pay Penalty