Understanding Generation-Skipping Transfer Tax: Protecting Multi-Generational Wealth in North Carolina

When families with substantial assets think about legacy planning, they often focus on avoiding probate and minimizing estate taxes. However, a less understood but equally important consideration lurks in the tax code: the generation-skipping transfer tax (GSTT). This federal tax can significantly erode wealth intended for grandchildren and future generations if not properly addressed in your estate plan.

For families in Southeastern North Carolina building wealth to benefit multiple generations, understanding how the GSTT works and planning around it can preserve hundreds of thousands or even millions of dollars for your descendants.

At Rountree Losee, LLP, our attorneys provide counsel on estate planning throughout North Carolina, South Carolina, and Tennessee. We take the time to understand your family’s unique circumstances and goals, then design strategies to preserve your wealth for the generations you care about most.

What Is the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax is a federal tax imposed when assets pass to beneficiaries who are two or more generations younger than the person transferring the wealth. Congress created this tax in 1976 to prevent wealthy families from avoiding estate taxes by skipping their children and leaving assets directly to grandchildren.

Without this tax, families could theoretically bypass estate taxation at each generational level. A grandparent could leave assets directly to grandchildren, and those grandchildren could leave assets to their grandchildren, effectively avoiding estate tax every other generation. The GSTT closes this loophole by imposing an additional tax when transfers skip generations.

The current GSTT rate matches the highest federal estate tax rate at 40%. This tax applies on top of any estate or gift taxes that might be due, making generation-skipping transfers potentially very expensive without proper planning.

Who Qualifies as a Skip Person?

Understanding who counts as a “skip person” under tax law helps you recognize when the GSTT might apply. Generally, a skip person is someone who is two or more generations below you. This includes your grandchildren, great-grandchildren, and other descendants at least 37.5 years younger than you.

Interestingly, if your child predeceases you, transfers to your grandchildren through that child’s line typically do not trigger the GSTT. The law includes this exception to avoid penalizing families who experience the loss of a child. Similarly, transfers to unrelated individuals who are more than 37.5 years younger than you also qualify as generation-skipping transfers.

The GSTT Exemption: Your Shield Against This Tax

The good news is that the tax code provides a substantial exemption amount that protects a significant portion of wealth from the GSTT. For 2025, each individual can transfer up to $13.99 million during their lifetime, to skip persons without incurring this tax. Married couples can effectively combine their exemptions to shield up to $27.98 million from the GSTT.

Due to the One Big Beautiful Bill Act (OBBA), the GSTT Exemption is now permanent. Similar to the estate tax exemption, the GSTT exemption will now be adjusted for inflation every year starting on January 1, 2026. This has now provided a great tool for families looking to provide for the next generation.

Common Scenarios That Trigger the GSTT in North Carolina

Several common estate planning situations can unexpectedly trigger generation-skipping transfer tax liability. Creating a trust that benefits grandchildren represents one frequent scenario. If you establish a trust with your grandchildren as beneficiaries and the trust assets exceed your available GSTT exemption, the excess amount will face this additional tax layer.

Direct gifts to grandchildren can also trigger the GSTT if they exceed the annual gift tax exclusion amount ($18,000 per beneficiary in 2024, rising to $19,000 in 2025). While annual exclusion gifts generally avoid gift tax, they can still count against your lifetime GSTT exemption if they go to skip persons.

Life insurance policies present another area where families sometimes overlook GSTT implications. If a life insurance trust names grandchildren as beneficiaries and the policy proceeds exceed your available exemption, the GSTT will apply to the excess.

Strategic Planning to Minimize Generation-Skipping Transfer Tax

Families committed to preserving multi-generational wealth can employ several strategies to minimize or avoid the GSTT. Allocating your GSTT exemption wisely represents the foundation of effective planning. This allocation requires careful attention because once made, it generally cannot be changed.

Dynasty trusts offer a powerful tool for wealthy families in North Carolina. These long-term trusts can span multiple generations, and by properly allocating GSTT exemption to the trust when created, all future growth and distributions can occur free from generation-skipping transfer tax. North Carolina law allows trusts to continue in perpetuity, making dynasty trusts particularly effective here.

Taking advantage of annual exclusion gifts provides another strategy. You can make gifts up to the annual exclusion amount directly to grandchildren each year without using any of your lifetime GSTT exemption. Over time, these gifts can transfer substantial wealth to younger generations tax-efficiently.

For families with closely held businesses or real estate, careful valuation planning can help maximize the amount of wealth transferred using available exemptions. Discounting strategies for partial interests in family entities can allow more assets to fit within exemption amounts.

Take Action to Protect Your Family’s Legacy

Understanding the generation-skipping transfer tax represents just one component of comprehensive estate planning, but for families with significant wealth, it can make a tremendous difference in how much you ultimately pass to future generations. The technical nature of GSTT planning requires careful analysis of your current estate plan and proactive strategies to minimize tax exposure.
If you have substantial assets and want to benefit your grandchildren or more remote descendants, now is the time to review your estate plan. Contact Rountree Losee, LLP to schedule a consultation about protecting your multi-generational wealth. With over 125 years of serving families in Southeastern North Carolina, our team can help you navigate the complexities of generation-skipping transfer tax and develop a plan that preserves your family’s legacy for generations to come.