Generation-Skipping Trust Administration: What Successor Trustees Must Know

When a trust names grandchildren or great-grandchildren as beneficiaries, it triggers a separate federal tax — the generation-skipping transfer tax — and creates trustee duties that go well beyond those of an ordinary irrevocable trust. This guide explains what you are dealing with, what the tax rules require, and what decisions you face as trustee.

What is a generation-skipping trust?

A generation-skipping trust (GST trust) is any trust that benefits people who are two or more generations below the person who created the trust (the grantor or settlor). Most commonly this means grandchildren or great-grandchildren, but it also includes unrelated individuals more than 37.5 years younger than the grantor.¹

GST trusts are created for one primary reason: to allow assets to pass to multiple generations while incurring estate tax only once (at most) rather than at each generational transfer. Without a GST trust, assets passed grandparent → child → grandchild would face estate tax twice. With a properly structured and funded GST trust, assets can pass grandparent → child (life income beneficiary) → grandchild (remainder) with no second estate tax at the child's death, because the assets were never in the child's taxable estate.

Skip persons vs. non-skip persons

The GST tax framework classifies every beneficiary relative to the grantor:¹

Non-skip persons

Individuals one generation below the grantor — typically the grantor's children. If your parent created this trust, you are a non-skip person. Distributions to non-skip persons are not subject to GST tax regardless of amount.

Skip persons

Individuals two or more generations below the grantor — grandchildren, great-grandchildren, or unrelated beneficiaries more than 37.5 years younger than the grantor. Distributions to skip persons can be subject to the 40% GST tax unless the transferred amount is covered by the grantor's GST exemption allocation.

Why this matters to you as trustee

You must know which beneficiaries are skip persons before you distribute anything. A $50,000 discretionary distribution to a grandchild could generate $20,000 in federal GST tax — or nothing, if the trust was properly exempted. You need to know the trust's inclusion ratio before making distributions, and that information comes from Form 709 records, trust counsel, or the estate attorney who set up the trust.

The three GST taxable events

The GST tax attaches to three types of events involving skip persons:²

1. Taxable distribution

A distribution of income or principal from a trust to a skip person (grandchild or lower) when a non-skip person (child) also has an interest in the trust. This is the most common event for a trustee managing a multi-generational trust while children are still alive. The trustee is responsible for filing Form 706-GS(D-1) and notifying the distributee, who owes the GST tax.³

2. Taxable termination

When a non-skip person's interest in the trust terminates — usually at a child's death — and only skip persons remain as beneficiaries. At that moment, the trust property is subject to GST tax as if it had been transferred directly to the skip persons. The trustee pays the GST tax from trust assets before continuing to administer the trust.

3. Direct skip

A transfer of trust property directly to a skip person, bypassing all non-skip beneficiaries. Less common in an ongoing trust context, but can happen on final distribution. The GST tax is typically borne by the transferor (the trust).

The GST exemption — $15 million in 2026

Every individual has a lifetime GST exemption: $15,000,000 in 2026, made permanent by the One Big Beautiful Bill Act (OBBBA) signed in July 2025.⁴ Before OBBBA, this amount was scheduled to revert to approximately $7 million in 2026 when the TCJA inflation-indexed doubling expired. OBBBA eliminated that sunset permanently.

How exemption allocation works

When the grantor created this trust and funded it, their estate attorney should have filed Form 709 (Gift Tax Return) to allocate GST exemption to the trust. The amount allocated relative to the trust's value at that time determines the trust's inclusion ratio — the fraction of any later GST transfer that is subject to tax:⁵

• Inclusion ratio of 0.0 (fully exempt): No GST tax on any taxable event. The trust was funded with an amount ≤ the grantor's remaining GST exemption at the time of funding.
• Inclusion ratio of 1.0 (fully taxable): Full 40% GST tax applies to all taxable distributions, taxable terminations, and direct skips.
• Inclusion ratio between 0 and 1 (partial exemption): Tax applies to the taxable portion only. This can result from partial exemption allocation or additions to a previously funded trust.

As trustee, you need to know this trust's inclusion ratio. It should appear in the trust administration records, the Form 709 filed when the trust was created or when gifts were made to it, or you can ask the estate attorney. If you cannot locate it, you need to reconstruct it — this requires knowing the trust's value and the exemption allocated at each funding date, which is why documentation from the grantor's lifetime is essential.

Automatic allocation and elections

Under IRC § 2632, the GST exemption is automatically allocated to certain transfers: direct skips occurring during life and (in limited cases) indirect skips to certain trusts. Trustees should not assume a trust has been properly exempted without verifying the Form 709 records. The automatic allocation rules are technical, and trustees of trusts created before 2001 especially need to verify with counsel because the rules have changed multiple times.

Distribution standards for grandchildren

Most GST trusts give the trustee discretion over distributions to grandchildren, typically under a HEMS standard (health, education, maintenance, and support) or a broader support standard. As trustee, you apply the same framework as for any discretionary distribution, with two important differences:

Balancing across generations

If the trust has children as income beneficiaries and grandchildren as remainder (or discretionary) beneficiaries, you face a multi-generational impartiality duty. Every large distribution to a grandchild reduces what remains for the children — and every decision to accumulate income at the trust level rather than distribute it costs the children after-tax income they otherwise would have received. This three-way balancing act (income beneficiaries, remainder/skip beneficiaries, and the trust itself as the long-term vehicle) requires a level of analysis beyond what most first-time trustees expect.

HEMS for a grandchild — practical application

Applying the HEMS standard to a grandchild's request looks similar to applying it for a child, but the time horizon matters more. Paying a grandchild's college tuition is squarely within "education." Funding a grandchild's down payment on a home is debatable — some courts have found it within "maintenance and support," others have not. When in doubt, seek guidance from trust counsel before making the distribution, and document your analysis of the HEMS factors in the trust records.

Direct tuition and medical payments bypass GST

There is an important planning tool available to you: direct payments of tuition or medical expenses to providers — not to the grandchild — are excluded from the GST tax entirely, with no dollar cap.⁶ If the trust document allows you to make these payments on behalf of a grandchild beneficiary, paying the university directly is far more tax-efficient than distributing the same amount to the grandchild first. A fee-only advisor can help you structure distributions to take advantage of this exclusion.

Annual exclusion and Crummey notices

If the trust document grants beneficiaries a withdrawal right (Crummey power), contributions to the trust may qualify for the annual gift tax exclusion: $19,000 per beneficiary in 2026.⁷ To preserve these exclusions, the trustee must send written Crummey notices to each beneficiary promptly after each contribution to the trust — typically within a few days — giving them a defined window (usually 30 days) to exercise their withdrawal right.

Crummey notices are a trustee administrative duty, not an optional formality. Failure to send notices can cause the IRS to disallow the annual exclusions, resulting in retroactive gift tax on contributions. If the trust was created with Crummey provisions and annual contributions were planned, verify whether prior trustees sent the required notices — if not, the trust may have an unresolved gift tax exposure.

Form 1041 for a GST trust

A generation-skipping trust files Form 1041 for each tax year it has $600 or more of gross income — the same rules that apply to any non-grantor trust.⁸ The GST tax itself is not reported on Form 1041; it is reported on separate forms (Form 706-GS for terminations, Form 706-GS(D) for distributions). But the trust's income tax planning is especially important in a GST context for one reason:

The compressed bracket trap in multi-generational context

Trusts hit the 37% federal income tax bracket at $16,000 of retained income in 2026 — compared to over $640,000 for a married individual filing jointly.⁹ In a dynasty trust designed to last 50 years, accumulating income at the trust level costs 37 cents on every dollar above $16,000. Over 30 years of compounding, this tax drag can erode wealth substantially faster than the estate tax it was designed to avoid.

The structural fix is the same as for any non-grantor trust: distribute income to beneficiaries when their personal tax rates are lower than the trust's compressed brackets. A grandchild in their 20s paying 22% on salary income is a much more tax-efficient vehicle for the trust's dividend income than the trust itself at 37%. The distribution deduction (IRC § 661) allows the trust to pass income to beneficiaries through Schedule K-1, which removes it from the trust's compressed brackets.

But in a GST trust, every income distribution to a grandchild is also a potential taxable distribution subject to 40% GST tax (if the trust is not fully exempt). This creates a tension: the income tax case says distribute; the GST analysis says every distribution to a skip person may carry GST tax. Getting this balance right is why a fee-only advisor working with a CPA experienced in trust taxation is essential for a non-trivial GST trust.

2026 trust income tax brackets

Source: IRS Rev. Proc. 2025-32; Form 1041-ES (2026). Capital gains rates: 0% up to $3,300; 15% $3,300–$16,250; 20% above $16,250.

Investment policy for a multi-generational trust

The Uniform Prudent Investor Act (UPIA) requires you to invest as a prudent investor — considering expected risk and return, the trust's purposes, and the needs of both current and future beneficiaries.¹⁰ For a dynasty trust, the investment time horizon is fundamentally different from a survivor's trust expected to wind down in 5-10 years:

Longer horizon = more equity defensible

A trust designed to last 30, 50, or 100 years has the time to recover from market drawdowns that a short-term trust cannot. Under UPIA, a trustee of a long-duration trust can defensibly maintain 60-80% equity allocation — sometimes higher — because the long horizon justifies accepting equity volatility in exchange for higher expected real returns. A conservative bond-heavy portfolio might feel "safe" but risks failing the remainder beneficiaries through inflation erosion over decades.

Inflation is the primary long-term risk

Over 50 years, a 3% annual inflation rate reduces the real value of $1 to approximately $0.23. A dynasty trust that preserves nominal value but loses real purchasing power has failed its purpose. The investment policy statement (IPS) for a long-duration trust should explicitly address real return targets, not just nominal ones, and should benchmark against inflation rather than a fixed-income index.

Total return approach

Long-duration trusts generally benefit from a total return approach rather than an income-only approach. Under total return, the trustee invests for growth + income combined, and distributions are made from total return (not just yield). This allows the portfolio to hold growth assets (equities, growth-oriented real estate) rather than artificially tilting toward high-dividend or high-coupon assets to generate distributable income. Most states have adopted the Uniform Principal and Income Act (UPIA) provisions that permit trustees to use the unitrust conversion or total return investment method.¹⁰

Dynasty trusts: perpetual term provisions

Some GST trusts are structured as dynasty trusts in states that permit trusts of indefinite or very long duration: Nevada, South Dakota, Delaware, Alaska, and New Hampshire are common choices. If the trust document specifies it was established under the law of one of these states, the trust may continue for generations beyond the lives of anyone alive today.

As trustee of a perpetual trust, you face governance challenges that shorter-duration trusts do not:

• Trustee succession: Individual trustees die or become incapacitated. A corporate co-trustee or trust protector provision helps ensure continuity. Most well-drafted dynasty trusts include a trust protector — a third party with power to modify the trust, replace the trustee, or adapt to changed circumstances — because no document written today can anticipate conditions 100 years from now.
• Document the trust's purpose: Future trustees who never knew the grantor will need a record of the trust's investment philosophy, family values, and intended purposes. A letter of intent from the grantor (or a resolution from the original trustee) should be maintained with the trust records.
• Annual accountings are essential: For a trust that may outlast everyone who set it up, annual accountings to beneficiaries (under UTC § 813) are not just a legal duty — they are the primary mechanism for maintaining trust among beneficiaries who may never have met each other.

When to seek court instructions

Generation-skipping trusts are complex enough that a trustee is well within their rights — and often should — seek court instructions in certain situations:¹¹

• You cannot determine the trust's GST inclusion ratio from available records
• Beneficiaries disagree about whether a distribution qualifies under the HEMS standard
• A taxable termination is imminent (a child beneficiary has a terminal diagnosis) and you need to document the GST tax exposure and planning options
• You want to modify the trust to address changed tax law or changed family circumstances (decanting, trust reformation)

Seeking court instructions is not a sign of incompetence. It is a defensible trustee decision that protects you from personal liability for hard calls in a complex trust.

What a fee-only advisor does for a GST trust

The duties layered on top of an ordinary irrevocable trust administration create advisory needs that most trustees cannot handle alone:

• Investment policy statement (IPS): Drafting and maintaining a written UPIA-compliant IPS for a multi-generational trust, with documented return targets, risk tolerance, and rebalancing rules
• Distribution analysis: Modeling the income tax and GST tax impact of different distribution scenarios before the trustee decides — so the decision is documented as informed and prudent
• Coordination with CPA: Annual Form 1041 plus any GST reporting forms (706-GS series) require a CPA who knows trust and estate tax. The fee-only advisor coordinates investment reporting with the CPA's tax filings
• Crummey notice calendar: If the trust receives ongoing contributions, maintaining the Crummey notice schedule and documentation
• Periodic trust review: Tax law changes (like OBBBA) can create planning opportunities or traps in a long-duration trust — periodic review by counsel and advisor catches these

Sources

1. IRC § 2613 — Skip Persons and Non-Skip Persons. Definitions governing who is subject to the generation-skipping transfer tax.
2. IRC § 2612 — Taxable Termination; Taxable Distribution; Direct Skip. The three GST taxable events and how they are defined.
3. IRS — About Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions. Filing requirements when a trustee makes a taxable distribution to a skip person.
4. IRS — 2026 Tax Inflation Adjustments including OBBBA Amendments. $15M estate/gift/GST exemption for 2026, permanent under One Big Beautiful Bill Act (July 2025).
5. IRC § 2642 — Inclusion Ratio. How the inclusion ratio is calculated and applied to determine the taxable portion of a GST transfer.
6. IRC § 2503(e) — Exclusion for Direct Tuition and Medical Payments. Transfers directly to educational institutions or medical providers are excluded from gift and GST tax with no dollar limit.
7. IRS Rev. Proc. 2025-32 — 2026 Inflation Adjustments. Annual gift tax exclusion $19,000 per recipient in 2026; GST exemption $15,000,000.
8. IRS — About Form 1041, U.S. Income Tax Return for Estates and Trusts. Filing requirements for non-grantor trusts.
9. IRS Form 1041-ES (2026) — Estimated Income Tax for Estates and Trusts. 2026 trust income tax rate schedule. 37% rate above $16,000; source IRS Rev. Proc. 2025-32.
10. Uniform Prudent Investor Act (UPIA). Governs trustee investment duties, total return approach, and the duty of impartiality among trust beneficiaries.
11. Uniform Trust Code (UTC) §§ 201–205 — Judicial Proceedings. Trustee's right to seek court instructions; protective effect of judicial approval on trustee liability.

This guide covers federal GST and income tax rules. State GST treatment, dynasty trust law, and trust income tax rules vary by state — consult a CPA and trust attorney in the governing state. Tax values verified against 2026 IRS Rev. Proc. 2025-32. GST exemption reflects OBBBA (July 2025) permanent $15M amount.