When Texas families think about transferring wealth, they often plan to leave their assets to their children. However, some families in Texas consider skipping a generation, leaving wealth directly to their grandchildren or even great-grandchildren. While this strategy can help preserve wealth over multiple generations, the government imposes a tax called the Generation-Skipping Transfer Tax (GSTT) to prevent excessive tax advantages. Below, a Houston, TX trust lawyer who has been with our firm since its founding in 2021 will break down what the GSTT is, how it works, and why it’s particularly important for Texas residents to understand this tax and the exemption for 2025.
What Is The Generation-Skipping Transfer Tax?
The Generation-Skipping Transfer Tax is a federal tax applied to transfers of wealth that “skip” a generation. This tax is in addition to the federal estate and gift taxes, making it a potentially costly consideration for estate planning in Texas no matter your age.
A generation-skipping transfer occurs when an individual transfers assets to someone who is at least 37.5 years younger than them, typically a grandchild or great-grandchild. It can also apply to unrelated individuals who are more than 37.5 years younger than the person making the transfer.
The purpose of the GSTT is to prevent families from avoiding estate taxes by transferring assets directly to younger generations. Without this tax, families could sidestep one layer of estate taxation, significantly reducing the revenue collected by the federal government.
How Does The GSTT Work?
The GSTT applies to three main types of transfers:
- Direct Skips: This is when assets are transferred directly to a skip person, such as a grandchild. For example, if a grandparent gives a large sum of money directly to their grandchild, this could trigger the GSTT.
- Taxable Distributions: These occur when a trust makes distributions to a skip person. If a trust established by a grandparent provides income to a grandchild, the GSTT may apply.
- Taxable Terminations: This happens when the interest in a trust held by a non-skip person (like a child) ends, and the trust assets are transferred to a skip person (like a grandchild).
In all cases, the GSTT is calculated at a flat rate equal to the highest federal estate tax rate. For 2025, that rate is expected to remain at 40%.
What Is The Generation-Skipping Transfer Tax Exemption?
To ease the burden of the GSTT, the government provides an exemption amount. This exemption allows individuals to transfer a certain amount of wealth to skip persons without incurring the GSTT. For 2025, the GSTT exemption is aligned with the federal estate tax exemption, which is $13.99 million per individual.
This means Texas residents can leave up to $13.99 million to their grandchildren or other skip persons without paying the GSTT. Married couples can combine their exemptions, allowing for a total exemption of $27.98 million.
Why The GSTT Exemption Matters For Texas Residents
The GSTT exemption provides significant opportunities for families in Texas who want to pass on wealth to younger generations. Here are some of the key advantages:
- Preserving Texas Family Ranches And Businesses: Many Texas families own valuable ranches, farms, or small businesses. The GSTT exemption allows them to transfer these assets to future generations without facing excessive taxes that might force a sale of the property.
- Tax Savings For Larger Estates: Texas residents with substantial estates can use the exemption to avoid the 40% GSTT rate, ensuring more of their hard-earned wealth stays within their family.
- Legacy Planning For Texas Generations: With the GSTT exemption, Texas families can create trusts, such as dynasty trusts, to ensure their wealth benefits multiple generations while avoiding unnecessary taxes.
Planning For 2025 In Texas
The GSTT exemption is a powerful tool, but it requires careful planning to use effectively. Here are some steps Texas residents should consider as they prepare their estate plans:
- Review Your Estate Plan with a Texas Attorney: Work with a Texas-based estate planning attorney to ensure your plan takes full advantage of the $13.99 million GSTT exemption. Laws and opportunities can vary, so having local expertise is crucial to guide you financially and protect your privacy.
- Act Before 2026: The exemption amount is set to decrease in 2026. Texas families considering large transfers to skip persons should take advantage of the higher exemption in 2025 to maximize their tax savings.
- Leverage Trusts for Texas Wealth: Trusts, such as dynasty trusts or irrevocable life insurance trusts, can help Texas families control how and when their wealth is distributed while leveraging the GSTT exemption.
- Coordinate with State Tax Laws: While Texas doesn’t have an estate tax, families should still ensure their plans align with federal rules and consider how trusts can be structured to maximize benefits for Texas residents.
The 2026 Sunset And Its Impact On Texas Families
The current GSTT exemption amount is historically high but is set to sunset after 2025 unless Congress acts to extend it. Starting in 2026, the exemption will likely return to pre-2018 levels, estimated to be around $6 million per individual. This potential reduction makes 2025 a critical year for estate planning in Texas.
Texas residents with significant estates or family-owned businesses should act now to take advantage of the exemption before it decreases. Delaying could result in higher taxes and reduced opportunities to preserve your family’s wealth.
The Generation-Skipping Transfer Tax can feel complex, but understanding how it works and utilizing the 2025 exemption can help Texas families create a plan that benefits future generations. By working with an experienced Texas estate planning attorney, you can develop a strategy that preserves your wealth while minimizing tax liabilities.
For Texas residents, 2025 presents a unique opportunity to take advantage of the $13.99 million GSTT exemption. With the exemption set to decrease in 2026, it’s crucial to act now. Start planning today to secure your family’s financial future and ensure your legacy thrives in the Lone Star State. Stuart Green Law, PLLC has been working on estate plans for families that protect their assets. We are licensed in Texas, Kentucky, Pennsylvania, and South Dakota, so contact us for help today.