Specialized Returns for Individuals · Gift tax

Effect on estate tax (e.g., Generation skipping transfer tax)

Two things about lifetime giving surprise clients who thought a gift ended the matter. The first is that gifts come back: taxable gifts are added to the estate tax base at death, and gift tax paid on gifts made in the last three years of life is added to the gross estate on top. The second is that a third tax exists. The generation-skipping transfer tax applies to transfers that reach two generations down, it is a flat top-bracket rate rather than a graduated one, and it has its own exemption that must be allocated rather than simply claimed.

The rule

Gifts return to the base. a tentative tax on the sum of the taxable estate and adjusted taxable gifts, reduced by the gift tax that would have been payable on post-1976 gifts under current rates — so lifetime gifts enlarge the base rather than reducing the exclusion arithmetic (IRC § 2001(b))^TY2026Verified 2026-08-20IRC § 2001(b), read at law.cornell.edu/uscode/text/26/2001 A gift removes future appreciation from the estate; it does not remove the gift.

And recent gift tax is grossed up. the gross estate is increased by any gift tax paid by the decedent or the decedent's spouse on gifts made during the 3-year period ending at death — so paying the gift tax does not get that money out of the estate unless the donor survives three years (IRC § 2035(b))^TY2026Verified 2026-08-20IRC § 2035(b), read at law.cornell.edu/uscode/text/26/2035 This is what defeats the deathbed gift: the money used to pay the gift tax is pulled back into the estate unless the donor lives three more years.

The third tax. three, and only three — a taxable distribution, a taxable termination and a direct skip (IRC § 2611(a))^TY2026Verified 2026-08-20IRC § 2611(a), read at law.cornell.edu/uscode/text/26/2611 A direct skip is an outright transfer to a skip person; a taxable termination and a taxable distribution reach trusts.

Who is a skip person. a natural person assigned to a generation 2 or more generations below the transferor's, or a trust in which all interests are held by skip persons or from which no distribution may be made to a non-skip person (IRC § 2613(a))^TY2026Verified 2026-08-20IRC § 2613(a), read at law.cornell.edu/uscode/text/26/2613

How generations are counted — by family, not by age. for a lineal descendant of a grandparent of the transferor or of the transferor's spouse, generation is assigned by counting generations from that grandparent — by family tree, never by age — with legal adoption treated as blood and the half-blood as the whole-blood (IRC § 2651(b))^TY2026Verified 2026-08-20IRC § 2651(b), read at law.cornell.edu/uscode/text/26/2651 A grandchild is two generations down whatever the ages involved, and a much younger child is one generation down.

Age decides only for strangers. only for an individual not assigned by the family rules: born not more than 12½ years after the transferor is the transferor's own generation, more than 12½ but not more than 37½ years after is the first younger generation, and a new generation every 25 years after that (IRC § 2651(d))^TY2026Verified 2026-08-20IRC § 2651(d), read at law.cornell.edu/uscode/text/26/2651 That is where the familiar 37½ years comes from, and it applies only to someone the family rules do not already place.

Two rules that stop the tax. anyone who has ever been married to the transferor takes the transferor's own generation, and anyone who has ever been married to a lineal descendant takes that descendant's generation — so a much younger spouse is never a skip person (IRC § 2651(c))^TY2026Verified 2026-08-20IRC § 2651(c), read at law.cornell.edu/uscode/text/26/2651 And where a descendant of a parent of the transferor, or of the transferor's spouse or former spouse, has a parent who died before the transfer, that individual and their descendants move up a generation — so a grandchild whose parent has died is not a skip person (IRC § 2651(e))^TY2026Verified 2026-08-20IRC § 2651(e), read at law.cornell.edu/uscode/text/26/2651

Two transfers outside the tax entirely. a transfer that would not be a taxable gift by reason of IRC § 2503(e), and a transfer already taxed under chapter 13 to a transferee at the same or a lower generation where the transfers do not have the effect of avoiding the tax (IRC § 2611(b))^TY2026Verified 2026-08-20IRC § 2611(b), read at law.cornell.edu/uscode/text/26/2611

The rate is flat. the maximum federal estate tax rate multiplied by the inclusion ratio — a flat top-bracket rate, not a graduated one, and reduced to nil only by allocating exemption (IRC § 2641(a))^TY2026Verified 2026-08-20IRC § 2641(a), read at law.cornell.edu/uscode/text/26/2641

And the exemption must be allocated. every individual has a GST exemption equal to the IRC § 2010(c) basic exclusion amount for the calendar year, allocable by the individual or the executor to property of which they are the transferor, and any allocation once made is irrevocable (IRC § 2631)^TY2026Verified 2026-08-20IRC § 2631, read at law.cornell.edu/uscode/text/26/2631 It is $15,000,000 for calendar year 2026 — the IRC § 2631(c) generation-skipping transfer exemption tracks the basic exclusion amount^TY2026Verified 2026-08-19Rev. Proc. 2025-32 §§ 2.14, 4.42, read at irs.gov/pub/irs-drop/rp-25-32.pdf — the same figure as the estate tax exclusion, but a separate amount, and unlike that one it is not portable between spouses.

Current figures

How it works in practice

Say what a gift actually achieves. It moves future growth and future income out of the estate. It does not move the gifted amount out of the transfer tax base, because § 2001(b)(1)(B) brings it back as an adjusted taxable gift. Clients told that gifts “use up” exclusion have been given a shortcut that happens to produce the right number; clients told that gifts escape the estate tax have simply been misinformed.

Model the three-year window on any gift large enough to generate tax. Where gift tax is actually paid — which now means a client who has exhausted the credit — § 2035(b) adds that tax to the gross estate if death follows within three years. The strategy of paying gift tax to shrink the estate works only for a donor who survives the window.

Test generation by relationship first. Reach for ages only when the recipient is not a lineal descendant of a grandparent of the client or the client’s spouse. A friend, an employee, a partner’s child: those are the § 2651(d) cases. Family is counted on the tree.

Check whether a parent has died before assuming a grandchild is a skip person. Section 2651(e) moves the grandchild up a generation where their parent predeceased the transfer, and the transfer stops being a generation-skipping transfer at all.

Allocate the exemption deliberately. The exemption is not applied automatically to the transfers where it does most good, and an allocation once made is irrevocable. The automatic allocation rules handle simple direct skips; anything involving a trust needs a decision on the Form 709.

And remember it is not portable. A surviving spouse can inherit unused basic exclusion through the portability election. There is no equivalent for the GST exemption — an unused amount dies with the first spouse, which is a reason for the first estate to allocate rather than leave it.

How this has changed

The generation-skipping tax in its present form dates from 1986, replacing a 1976 version that was repealed retroactively. Sections 2611, 2613, 2631, 2641 and 2651 have not been amended in substance since, and Pub. L. 119-21 touched none of them.

What the 2025 Act did was raise the basic exclusion amount, which the GST exemption follows automatically: § 2631(c) sets the exemption equal to the § 2010(c) basic exclusion amount for the calendar year, so the exemption is now $15,000,000 for calendar year 2026 — the IRC § 2631(c) generation-skipping transfer exemption tracks the basic exclusion amount^TY2026Verified 2026-08-19Rev. Proc. 2025-32 §§ 2.14, 4.42, read at irs.gov/pub/irs-drop/rp-25-32.pdf without any amendment to chapter 13. That is a large practical change delivered entirely by a cross-reference.

The change in emphasis matters more than the change in figures. When the exemption was small, GST planning was about rationing it. At the current level, very few families will pay the tax, and the risk has shifted from paying it to tripping it — a trust drafted decades ago whose beneficiaries have now moved a generation down, or an allocation never made because nobody expected the tax to matter. The tax is rarer and the mistakes are quieter.

Exam focus

Generation assignment is the reliable question. Work it in order: is the person a lineal descendant of a grandparent of the transferor or the transferor’s spouse — if so, count the tree. Has the person ever been married to the transferor or to a lineal descendant — if so, take that generation. Only if neither applies do you reach § 2651(d) and the 12½ and 37½ year bands.

Expect the predeceased parent rule as a fact pattern in which a grandchild’s parent has died. Expect the § 2611(b)(1) exclusion for direct tuition and medical payments.

On the estate tax side, know that adjusted taxable gifts are added to the base, and know the § 2035(b) gross-up — including that it reaches gift tax paid by the spouse.

Check yourself

1. A donor pays $900,000 of gift tax on a gift made 14 months before her death. What is the effect on her gross estate?

Answer: It is increased by the $900,000. IRC § 2035(b) adds any gift tax paid by the decedent or the decedent’s spouse on gifts made during the 3-year period ending at death.

2. A 68-year-old transfers property to his 26-year-old daughter. Is she a skip person?

Answer: No. She is a lineal descendant of a grandparent of the transferor, so IRC § 2651(b) assigns her by counting generations on the family tree — one generation below him. The age bands in § 2651(d) apply only where the family rules do not assign a generation.

3. A transferor makes a gift to his grandson. The grandson’s mother, the transferor’s daughter, died last year. Is this a generation-skipping transfer?

Answer: No. Under IRC § 2651(e) the grandson is treated as moving up a generation because his parent died before the transfer, so he is one generation below the transferor and not a skip person.

4. How is the generation-skipping transfer tax rate determined?

Answer: The applicable rate is the maximum federal estate tax rate multiplied by the inclusion ratio for the transfer (IRC § 2641(a)). It is flat, not graduated.

5. A grandmother pays her grandson’s tuition directly to his college. Is that a generation-skipping transfer?

Answer: No. IRC § 2611(b)(1) excludes any transfer that, if made inter vivos, would not be a taxable gift by reason of § 2503(e) — which covers tuition paid directly to the educational organization.