What is the Generation-Skipping Transfer Tax in Illinois?

You may have heard about various taxes that could affect how much of your wealth actually reaches your intended beneficiaries. One of the most complex and potentially costly types of taxes in estate planning is the Generation-Skipping Transfer Tax (GSTT), which can significantly impact families who want to transfer substantial assets directly to grandchildren or other younger generations. 

The GSTT is a federal tax designed to prevent people from attempting to avoid estate taxes by “skipping” a generation when transferring wealth, and understanding how it applies in Illinois is crucial for effective estate planning. Speak to an experienced Naperville, IL estate planning attorney to minimize the impact of the GSTT on your estate. 

How Does the Generation-Skipping Transfer Tax Work?

The GSTT is a federal tax imposed on transfers of wealth that skips a generation. It is typically imposed on grandchildren or on younger generations that are unrelated by blood, marriage, or adoption. This tax is assessed in addition to federal estate and gift taxes, and is meant to prevent families from avoiding taxation by structuring their transfers of wealth such that they bypass a generation. 

The GSTT will apply to direct transfers that skip a generation, such as gifts from grandparents to grandchildren or trusts that name grandchildren as beneficiaries. If your estate or gifts exceed federal exemption limits, your heirs could be facing a significant tax bill, especially if you use trusts to skip a generation.

What Transfers Trigger the Generation-Skipping Transfer Tax?

The Generation-Skipping Transfer Tax can be triggered by several types of transfers. It applies to transfers made to “skip” individuals who are two or more generations removed from you. This typically includes grandchildren, great-grandchildren, and unrelated individuals who are more than 37½ years younger than you. The tax can be triggered by three types of transfers: direct skips, taxable distributions, and taxable terminations.

A direct skip occurs when you transfer assets directly to a “skip” individual, such as by making a large gift to your grandchild or naming them as a beneficiary in your will. Taxable distributions happen when a trust makes a distribution to a skip person, while taxable terminations occur when a trust interest held by a non-skip person ends, leaving only skip persons with interests in the trust. 

How Much is the Generation-Skipping Transfer Tax?

The current federal GSTT tax rate is 40 percent, which is equivalent to the highest estate and gift tax rate at the federal level. This tax is imposed in addition to any other federal gift or estate taxes that may be owed, making the total tax burden potentially substantial. For 2025, the federal GST exemption amount is $13.99 million per individual, meaning transfers exceeding this amount could be subject to the 40 percent tax rate.

Is There a GSTT Exemption? 

As of 2025, there is a federal GSTT exemption of $13.9 million per individual (matching the estate and gift tax exemption), although this figure is scheduled to decrease in 2026 unless Congress takes action. Married couples can combine their exemptions for a total of $27.98  million.

If you make generation-skipping transfers that fall below this exemption amount, you will not owe GSTT. But if your transfers exceed the exemption, the amount above the limit will be taxed at a flat 40 percent.

This exemption can be allocated to gifts during your lifetime or be used after death. Properly structuring your estate plan with the help of an experienced Illinois estate planning attorney can ensure you maximize your exemption and minimize unnecessary taxation.

Who Pays the Generation-Skipping Transfer Tax?

Who bears the responsibility for paying the Generation-Skipping Transfer Tax (GSTT) depends on the type of transfer that takes place. Generally, the person making the gift or bequest, or the trust from which the transfer is made, is responsible for paying the GSTT, not the recipient.

What Planning Strategies Can Minimize the Generation-Skipping Transfer Tax?

Several strategies can help families minimize or avoid the Generation-Skipping Transfer Tax altogether. One of the most important is the proper allocation of your GSTT exemption to transfers and trusts. This allocation must be done carefully and requires filing specific tax forms.

Dynasty trusts represent another powerful planning tool that can help families maximize their GSTT exemption. These are irrevocable trusts designed to last for multiple generations which can provide benefits to children, grandchildren, and future descendants while using only a portion of your GSTT exemption. When properly structured, a dynasty trust can shield significant wealth from generation-skipping transfer taxes for decades.

Annual exclusion gifts also provide opportunities for tax-free transfers to skip persons. For 2025, individuals can make annual gifts of up to $19,000 to as many recipients as they choose without triggering gift tax consequences. Additionally, direct payments for medical expenses and tuition do not count against the GSTT exemption, making them valuable planning opportunities for families wanting to support younger generations.

Charitable giving donations to charities that are not subject to the GSTT can also reduce the size of the taxable estate. 

Does Illinois Have a State-Level Generation-Skipping Tax?

Illinois does not impose a separate generation-skipping transfer tax. However, the state does have its own estate tax with a much lower exemption threshold — currently $4 million per individual. That means that while the federal GSTT may not apply to smaller estates, Illinois estate taxes may still be due.

For Illinois residents with large estates, it is important to consider both the federal GSTT and the Illinois estate tax when making plans to pass assets to grandchildren or younger beneficiaries. Coordinating these two tax systems can help minimize the total tax burden.

Call a Naperville, IL Estate Planning Attorney 

If you are considering leaving assets to your grandchildren or great-grandchildren, you should speak to an experienced Naperville, IL estate planning attorney to understand how the Generation-Skipping Transfer Tax could affect you and to discuss your options to mitigate its effects. At the Gierach Law Firm, we focus on representing clients with complex estate planning considerations. Call the law firm at 630-756-1160 to schedule a consultation.