As you think ahead to how you want to leave behind a legacy of wise investments and smart financial decisions, you may want to include your grandchildren in your estate plan. However, there’s a tax penalty you may face for your generosity—the Generation-Skipping Transfer (GST) tax.
Designed to prevent families from avoiding estate taxes by “skipping” a generation, the GST tax can take a sizable bite out of your gifts. But with strategic planning, especially for New York City families with net worths of $2–5 million, it’s possible to pass wealth efficiently and meaningfully using the very tools the tax code provides.
The estate planning attorneys at Landskind & Ricaforte Law Group, P.C. know that while the GST tax can be high, there are legal strategies to help families with a high net worth avoid its impact. Here, we discuss how the right planning can make all the difference.
The GST Tax Explained
The GST tax is a federal tax (currently 40%) applied to transfers of wealth that skip a generation—such as gifts or bequests to grandchildren. It applies in addition to estate or gift taxes and targets individuals with substantial estates.
The GST tax is imposed on transfers to people who are two or more generations below the person making the gift; generally, the recipients are grandchildren. For transfers to non-relatives, the recipient is a “skip person” if they’re more than 37.5 years younger than the transferor. The tax rate is a flat rate of 40% of the fair market value of the transferred asset.
This tax can consume an enormous part of a gift. For example, if a grandfather wants to leave $10 million directly to his grandchild when he dies, and that grandfather has fully utilized his GST tax exemption and estate tax exemption, the estate tax will chew up nearly $4 million. With the additional GST tax on the remaining $6 million, the grandchild is left with approximately $3.6 million—not what the grandfather intended.
To help with the enormous impact of this tax, Congress allows each taxpayer a GST exemption. Under the Big Beautiful Bill for 2026, the exemption is $15 million per person. Thus, a married couple can shield $30 million. While these taxes seem to be for the ultra-wealthy, those in middle-wealth families may be exposed to them, too.
How Families With $2-5 Million Can Avoid or Minimize the GST Tax
There are a variety of legal strategies you can use to avoid or help reduce the impact of the GST tax, including the following:
Establish a Dynasty Trust
A dynasty trust is an irrevocable trust, which means when you transfer assets into the trust, you give up control of those assets and the ability to change the terms of the trust. This type of trust allows wealth to pass through multiple generations without triggering estate or GST taxes at each level. In New York, these trusts must terminate within a specific timeframe, usually 21 years after the death of the last surviving beneficiary alive at the trust's creation. A dynasty trust can protect assets from estate taxes and creditors for a significant period of time—often over 100 years; thus, it’s a valuable and strategic tool for long-term legacy planning.
Specific Benefits of a Dynasty Trust
A Dynasty trust offers many benefits, including the following
- It shields assets from GST tax by allocating your exemption at the time the trust was created
- It protects beneficiaries from conflict with creditors and divorce
- It allows trustees to manage the distribution according to your family values and goals
Create an Irrevocable Life Insurance Trust (ILIT)
If structured properly, an ILIT removes a life insurance policy from your taxable estate and allows the proceeds to benefit grandchildren directly—without incurring GST tax. The right planning can help with the following:
- Gift premium payments using your annual GST exemption
- Ensure that the trust receives the death benefit tax-free
- Ensure that the payout can support a grandchild’s future needs, including their education or housing
Other strategies include grantor retained annuity trusts (GRATs), charitable lead trusts, and Crummey trusts (CLTs). Each structure has different requirements, and the right choice depends on your family goals, asset types, and income needs.
Be Proactive When Using Your GST Exemption
Each person has a lifetime GST exemption that can be allocated to shield transfers from GST tax. The key is to allocate the exemption proactively—especially when funding irrevocable trusts. If you fail to allocate the exemption when creating a trust or making a gift, the GST tax could apply unexpectedly later, such as when your grandchild receives a distribution. Proactive allocation ensures the transfer is fully sheltered from the tax.
Know the Red Flags
There are some mistakes you want to avoid when planning your estate—pitfalls that can unintentionally trigger GST taxes. Our experienced state planning attorneys know how to help ensure you don’t do the following:
- Name grandchildren as direct beneficiaries without allocating GST exemption
- Leave large gifts in your will without clarifying how the GST exemption should apply
- Use a “pot trust"—pooling assets into a single fund for multiple beneficiaries and giving the trustee discretion to distribute funds rather than give equal shares
Let Landskind & Ricaforte Law Group, P.C. Protect Your Legacy
Leaving some of your legacy to your grandchildren should be a positive event—not one that’s jeopardized by unnecessary tax burdens. GST tax planning isn't just for the ultra-wealthy—it’s a smart move for New York families with $2–5 million in assets looking to preserve and protect their legacy across generations. Work with our knowledgeable estate planning attorneys who can create a plan that honors your wishes while minimizing taxes. The earlier you act, the more options you’ll have to shield your legacy and support the future of your grandchildren. Read our client testimonials to learn how we’ve helped other New Yorkers protect their grandchildren from unexpected taxes.