Generation-Skipping Transfer Trusts & Dynasty Trusts

Estate Planning

The Generation-Skipping Transfer Trust is a separate and distinct tax system that applies in addition to the estate or gift tax. Each taxpayer has a federal estate and gift tax exemption of $13,610,000 (2024), as well as an exemption from the GSTT equal to $13,610,000 (2024). Unlike the federal estate and gift tax exemption, a taxpayer must fully allocate their GSTT exemption during life or at death. 

The GSTT exemption is not “portable” between spouses. The balance is not available to the surviving spouse or surviving spouse’s estate for later generation-skipping transfers. With proper planning and allocation of the transfer tax exemption and generation-skipping exemption, a dynasty trust can be created to transfer significant wealth through multiple generations without the imposition of either GSTT or federal estate taxes. The assets held by the dynasty trust are sheltered from any future transfer taxation for as long as the trust lasts. 
Even when the inheritance is relatively small, the ability to protect the assets from taxes, creditors, and predators through multiple generations can be valuable.

Gifts into an irrevocable dynasty trust using the grantor’s (and spouse’s) lifetime gift exemption and GSTT exemption can be leveraged with the use of whole life insurance. A survivorship policy on the life of the grantor and spouse can provide an opportunity to minimize taxes and maximize family wealth over many generations. The exemptions (gift and GSTT) are allocated to contributions to the trust used to pay the premiums on life insurance owned by the trust. Insurance death proceeds provide the liquidity needed to support the grantor’s family after their death.

Case Study

The multi-generational estate tax savings of a dynasty trust funded with life insurance creates a pool of wealth. The following is a simplified example of the savings and helps growth potential of a dynasty trust.

Todd and Carol, a very successful married couple in their 70s, are part owners of a privately held family business. Their combined net worth is estimated to be over $28 million, with most of it in investments and a minority interest in the business. 

Todd and Carol have two children: Kate and Al. Their children are married and successful in their own right. Todd and Carol have six grandchildren. Todd and Carol transfer their full gift and estate tax exemption amounts to the dynasty trust (and each fully allocates their GSTT exemption to the transfer).

Table 1: Dynasty Trust

Table 2: No Trust Used

Table 1: Shows the results of using a dynasty trust to allow the assets to grow and be protected from future estate and generation-skipping taxes.

Table 2: Shows the results if a dynasty trust is not used, transfer taxes are paid at each generation level, thereby decreasing the inheritance left over 
multiple generations.

Assumptions

1. Estate grows for 25 years after the prior generation’s death.
2. 4.00% growth rate (after taxes and distributions).
3. The amount being transferred to heirs each generation outside of a dynasty trust is fully taxable in the estate of the deceased ancestor — meaning that chart assumes other assets will use up available estate tax exemption.
4. 40% transfer tax rate.

CRN202506-2621445

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