Navigating the Generation-Skipping Transfer Tax for Northern Trust Families

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'Thoughtful multigenerational planning can help Northern Trust employees navigate GSTT considerations more effectively, making it an essential part of preparing families for long-term financial transitions.' -- Paul Bergeron, a representative of The Retirement Group, a division of Wealth Enhancement.

'Carefully structuring multigenerational wealth transfers can help Northern Trust employees stay aligned with GSTT rules and should be considered when discussing long-term family planning priorities.' -- Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

1. Key concepts behind the generation-skipping transfer tax (GSTT).

2. Common exemptions and exclusions that may lessen transfer tax exposure.

3. Planning methods that can help families pass wealth across generations.

Important Takeaways on How to Transfer Wealth Across Generations

The generation-skipping transfer tax (GSTT) is relevant for any Northern Trust employees transferring wealth to grandchildren or other individuals that skip over your children's generation.

Both GSTT and gift or estate taxes may apply when transferring assets to heirs more than one generation below the transferor.

Exemptions may lower transfer tax liability if planning is structured thoughtfully.

Federal gift and estate taxes—applicable to transfers during life or at death—are familiar to many Northern Trust employees. However, when assets move to people more than one generation below the transferor, such as a gift from a grandparent to a grandchild, the federal generation-skipping transfer tax (GSTT) may also apply.

Generation-Skipping Transfer Tax: What Is It?

Transfers to “skip persons,” those more than one generation below the transferor or more than 37½ years younger, are subject to the GSTT. This federal tax applies in addition to any federal gift or estate tax due and equals the highest federal gift and estate tax rate in effect—a flat rate of 40%—which is relevant for Northern Trust employees engaging in multigenerational planning.

The GSTT was introduced in 1976 to address concerns that affluent families could shift assets in ways that bypassed estate taxes at each generational level. ¹

Lifetime Exemptions and Gift Tax Exclusions

Transfers made during life or at death to anyone other than a spouse or qualified charity may be subject to federal gift or estate tax. Key exclusions include several that may benefit Northern Trust employees:

Annual gift tax exemption:  In 2026, individuals may give up to $19,000 per recipient without incurring federal estate or gift tax. Couples may combine exclusions for a total of $38,000 per beneficiary. ²  For example, a married couple with two children could give $76,000 total ($38,000 to each child) annually without gift tax.

Qualified transfers:  Payments made directly to educational institutions for tuition or to medical providers for medical expenses are not considered taxable gifts. There is no dollar limit on these transfers. ¹

Lifetime unified exclusion:  Individuals may transfer up to $13.99 million (or $27.98 million per married couple) during life or at death without federal gift or estate tax. ²  Lifetime gifts reduce the remaining exclusion available at death.

Transfers exceeding these exclusions are taxed at the top federal estate and gift tax rate of 40%.

Exclusions & Exemptions from GSTT

The GSTT has rules similar to traditional gift tax laws, which can influence planning for Northern Trust families:

• - Grandparents may give up to $19,000 directly to a grandchild in 2026 without triggering gift tax or GSTT.

• - Each individual has a $13.99 million lifetime GSTT exemption ($27.98 million per couple), though this exemption is not independent from estate or gift tax rules.

• Transfers above exemption thresholds are subject to a 40% GSTT.

• GSTT applies only at the federal level, although some states may impose their own estate or inheritance taxes.

When Does the GSTT Start to Apply?

The GSTT applies to three types of taxable events, all of which may arise in multigenerational planning for Northern Trust families:

Direct skips:  Transfers made directly to a skip person or to a trust for their exclusive benefit. The transferor or their estate pays the tax.

Taxable distributions:  Distributions from a trust to a skip person. The beneficiary pays the tax.

Taxable terminations:  Occur when a trust interest ends and only skip persons remain as beneficiaries. The trustee pays the tax.

GSTT Exemption Allocations

Transfers—outright or to a trust—may qualify for GSTT exemption as long as the exemption is properly allocated. Once allocated, all future growth on those trust assets is generally free from GSTT, a strategy Northern Trust families may want to use.

For example, if a person contributed $10 million to an irrevocable trust for grandchildren in 2024 and allocated the GSTT exemption, and the trust later grew to $20 million, future distributions would not incur GSTT. ¹

Methods for Lowering GSTT

1. 529 Plan Contributions

Contributions to 529 college savings plans are treated as completed gifts, even though account owners can change the beneficiary. Grandparents may “superfund” a 529 plan with five years of annual exclusions at once—up to $95,000 per beneficiary in 2025 or $190,000 per beneficiary for a married couple filing jointly ³ —which may interest Northern Trust retirees.

2. Dynasty Trusts

Dynasty trusts are irrevocable trusts designed to last across multiple generations. Some states allow long-term or perpetual trusts, while others limit trust duration under the “rule against perpetuities.” These trusts can combine GSTT planning with long-term asset preservation features and, when fully exempt from GSTT, future distributions or terminations can occur without additional GSTT ⁴ —an appealing option for extended family planning.

Concluding Remarks

Although GSTT planning can be complex, exemptions and structured transfers may help Northern Trust employees reduce or eliminate federal taxes on wealth passed to grandchildren or other skip persons.

The Retirement Group can assist you with wealth transfer planning and retirement income strategies. Call our team at (800) 900-5867 for guidance.

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Sources:

1. Fidelity Investments. “Understanding the Generation-Skipping Transfer Tax.”  Fidelity , 3 Oct. 2025,  www.fidelity.com/viewpoints/wealth-management/insights/generation-skipping-transfer-tax .

2. Internal Revenue Service. “ IRS releases tax inflation adjustments for tax year 2027 .”  IRS.gov , 9 Oct. 2025.

3. Bendig, Erin. “How This 529 ‘Superfund’ Strategy Can Transform Your Estate Plan.”  Kiplinger , 12 Sept. 2025,  www.kiplinger.com/personal-finance/this-super-529-strategy-can-help-you-jumpstart-college-savings .

4. Investopedia. ' What Is a Dynasty Trust? ' by Will Kenton. 31 March 2025.