If you’ve accumulated significant wealth in your lifetime, you probably want to preserve as much of that wealth as possible for future generations, not hand it over to the IRS. There are many types of trusts and other estate planning tools that can help you avoid significant tax liability, and one of them is the generation-skipping trust (GST).
A generation-skipping trust allows you to avoid at least some estate tax by transferring assets to your grandchildren, effectively “skipping” your children’s generation. Some GSTs last for many generations.
However, in Texas, GSTs may not last forever. This means that if you’re creating a GST or will eventually be inheriting assets from one, it helps to understand the termination of generation-skipping trusts. Here’s what you need to know about GST termination and what comes after.
Understanding the Duration of a Generation-Skipping Trust (GST)
Generation-skipping trusts can provide an opportunity to avoid estate taxes, at least in the short term. Depending on the assets transferred into the trust, a GST can stretch over many generations.
Some states allow generation-skipping trusts to continue indefinitely. When a GST is perpetual (or at least seems as if it will continue for the foreseeable future), it’s referred to as a “dynasty trust.”
Other states have laws establishing a “rule against perpetuities.” A rule against perpetuities is a law limiting the length of time a generation-skipping trust may last. States that impose a rule against perpetuities do so to ensure that the grantor of the trust doesn’t have indefinite control over a particular estate or property interest.
In Texas and other states that have established rules against perpetuities, a generation-skipping trust must end when the particular state’s time limit is reached. However, this is far from the only circumstance where a GST must terminate.
Common Triggers for the Termination of a Generation-Skipping Trust
Before you create a trust (or inherit wealth from one), it can be helpful to understand how a generation-skipping trust terminates. GSTs generally can’t last forever. In most cases, the trust can be terminated when one of the following happens:
- Trust assets are fully depleted
- The last beneficiary dies
- A certain time period (described in the initial trust agreement) has passed
- State law orders the trust’s termination
Here’s a closer look at each trigger for termination:
Trust Assets Are Fully Depleted
This is one of the most straightforward reasons for terminating a trust. Trust assets often appreciate in value over time, but in many generation-skipping trusts, they eventually run out. When this happens, the trust will terminate.
Some generation-skipping trusts have “safety valve” provisions to ensure that the trust doesn’t become financially impractical to operate. Safety valve provisions are clauses in a trust that allow for some level of flexibility.
If the grantor of a trust believes that the assets will one day run out, they might include a safety valve provision that terminates the trust once the total value of trust assets drops below a certain amount.
The Last Beneficiary Dies
Generation-skipping trusts were designed to pass assets down through generations. If there are no more generations to support, the trust will terminate.
For example, imagine your grandparents created a generation-skipping trust to provide financial support for future generations. You and your siblings received distributions, and your children did, too. However, none of your children had children of their own. There are no future beneficiaries, so once your children have died, the trust will terminate.
A Certain Time Period Has Passed
Generation-skipping trusts don’t necessarily have to keep going until they are depleted or there are no new trust beneficiaries to support. Some are self-limiting, meaning they specify a particular end date or event.
For instance, a grantor might create a generation-skipping trust that pays a distribution to each grandchild on their 18th birthday. The grantor might stipulate that the trust must terminate after the youngest grandchild receives a distribution.
State Law Orders the Trust’s Termination
Each state is free to set its own laws surrounding generation-skipping trusts. If you’re in Texas or another state that limits the duration of trusts, the trust legally must terminate once the state deadline has been reached.
However, some states have laws that are more complex than a single deadline. New tax laws in Texas limit generation-skipping trusts to 300 years. There is one exception: real estate may only remain in the trust for 100 years. To avoid accidentally violating tax law, you should carefully choose your trustee and make sure you understand how state and federal laws apply to your trust.
Only Skip Persons Are Remaining
Generally, termination of a generation-skipping trust under the circumstances above isn’t taxable. However, taxable termination occurs when there are no more non-skip beneficiaries remaining.
For instance, a grantor might set up a GST to provide for their grandchildren. If the grandchildren’s parents (the “non-skip beneficiaries”) die, the trust must be terminated, and taxes will likely be due.
This kind of taxable termination can be difficult to understand. To reduce your risk of costly mistakes, it’s worth working with tax professionals or estate planning attorneys who are up to date on current tax law. An experienced professional can prepare all necessary paperwork, file it with the IRS, pay any taxes due, and ensure that the trust is properly closed.
The Rule Against Perpetuities and Its Impact on GST Termination
Texas is one of the many states that imposes a “rule against perpetuities.” While each state is free to set its own rule against perpetuities, the concept originated with a common-law rule stipulating that a trust must terminate 21 years after the death of someone who was alive when the trust was created.
This law helped ensure that a deceased person wouldn’t maintain indefinite control over properties. It also automatically limited the duration of generation-skipping trusts. Some states still have this rule, but over the last several decades, many states have extended their rules against perpetuities or even eliminated them altogether.
In states with rules against perpetuities in place, a GST must terminate once it reaches the state’s limit. For example, in Texas, generation-skipping trusts may last for 300 years. Once 300 years have passed since the creation of a GST, the trust must be terminated according to state law. Texas’s 300-year rule is a relatively recent change that only went into effect in 2021.
This change is good news if you want to pass wealth down through multiple generations. Because GSTs can last far longer than they once could, termination of generation-skipping trusts under state law is becoming less common.
Tax Implications Upon GST Termination
When you terminate a trust, final distribution of assets is far from your only concern. Your estate planning attorney or tax professional can help you determine whether the generation-skipping transfer tax is due.
When most people think of taxes as they relate to generation-skipping trusts, they’re imagining generation-skipping transfer taxes (GSTTs). Generation-skipping transfer tax is assessed when you transfer wealth down to a skip person—someone who is two or more generations younger than you are.
However, taxes may not be assessed on every transfer. That’s because there is a lifetime GSTT exemption that is equal to (but separate from) the federal gift and estate tax exemption.
For 2025, the generation-skipping transfer tax exemption is $13.99 million. This means that you may transfer up to $13.99 million to skip persons without having to pay the generation-skipping transfer tax.
Once you have exceeded the exemption, the generation-skipping transfer tax rate is 40%, which is the same as the maximum tax rate for gift and estate tax.
Just like with the federal estate tax and gift tax, you may allocate your GSTT exemption to certain transactions. If you don’t have a preference, automatic allocation rules apply. If you anticipate transferring more than $13.99 million to skip persons, it may be worth sitting down with professionals to allocate GST exemptions.
There’s nothing wrong with using the automatic allocation. However, strategic allocation may ultimately reduce or even eliminate the generation-skipping tax that you otherwise would have owed.
Understanding the generation-skipping transfer tax is important, but you should also be aware of the tax implications of generation-skipping trust termination. If the trust runs out of assets or your state’s time limit has been reached, the termination generally isn’t taxable.
Taxable Terminations
There is one main situation where a taxable termination of a generation-skipping trust occurs. If all non-skip beneficiaries die and only skip persons remain, the trust must be terminated, and generation-skipping transfer tax may be due.
Here’s an example. Imagine you set up a generation-skipping trust for your grandchildren. In this scenario, your children are non-skip persons, meaning they won’t receive money from the trust. Your grandchildren are skip persons.
If all of your children pass away and only skip persons (your grandchildren) remain, the trust must be terminated. If you haven’t already allocated your GST exemption, you might choose to allocate your GSTT exemption at termination to reduce or eliminate any taxes due.
What Steps Are Involved in Terminating a GST?
When it’s time to terminate a generation-skipping trust, your trustee will typically handle the process. Terminating a trust is often complicated, especially when taxes are also due. This isn’t a process you should take on yourself. If you make an error, you might find yourself on the hook for a surprise tax bill.
Here’s a look at some of the key steps in terminating a GST:
1. Distributing Remaining Assets According to Trust Provisions
In some cases (like when a trust is terminated because its assets have been depleted), there may be no need to distribute the remaining assets in the trust. However, your trust should include detailed provisions explaining how all remaining assets should be distributed.
If your trust’s provisions are unclear, your estate planning attorney can help you interpret them and decide what steps to take next.
2. Determining Whether Taxes Are Due (and Allocating Exemptions if So)
Before reporting the termination to the IRS, the trustee must determine whether taxes are due. If the value of the assets in the trust exceeds $13.99 million, you must allocate your GST exemption.
Automatic allocation may be favorable to you, but the best course of action is to ask your tax professional or financial advisor to guide you.
3. Reporting the Termination to the IRS
It’s always important to report terminated generation-skipping trusts to the IRS. However, it’s especially critical if the termination is a taxable one. Making mistakes when calculating the tax due or paying it can lead to civil penalties. If the IRS believes that your trustee is deliberately evading taxes, criminal penalties are possible, too.
To report the termination, your trustee will complete IRS Form 706-GS (T), Generation Skipping Transfer Tax Return for Terminations. This form includes the trust’s inclusion ratio (how much of it is subject to taxes), the total value of assets held in the trust, and the value of any federal taxes due. It also notifies the IRS that the trust is now closed.
4. Complete Administrative Steps
In most cases, you or your trustee will have at least some administrative work to do to close out the trust. Once the remaining assets have been distributed and taxes have been paid, you may close the trust’s bank accounts.
Options for Modifying or Extending a Generation-Skipping Trust
In some instances, you may be able to avoid the termination of generation-skipping trusts by modifying or extending them. However, it’s important to remember that because generation-skipping trusts are typically irrevocable trusts, they are very difficult (and sometimes impossible) to change.
If you’re hoping to modify your GST in some way, your estate planning attorney can help. Your options depend on your situation, but in general, there are two potential strategies for modifying your trust.
Trust Decanting
When you decant your existing GST, you metaphorically “pour” the trust’s remaining assets into a new trust. For this strategy to make sense, the new trust must be an improvement over the old one.
Given the relatively recent change in the Texas rule against perpetuities, decanting an older trust may allow you to extend the life of your generation-skipping trust.
However, preserving family wealth and passing it down through multiple generations is a complex endeavor. Depending on your circumstances, your estate planning attorney might think that trust decanting is a viable strategy or they might suggest something completely different.
Judicial Modification
If you want to modify your trust in a way that trust decanting won’t allow, judicial modification may be a possibility. However, if you go this route, you should understand that it’s far from a sure thing. To adequately protect trust assets and preserve them for younger generations, GSTs must be irrevocable.
Irrevocable trusts are broadly considered to be unchangeable. However, in exceptional circumstances, a court may examine your situation and allow you to modify the trust document.
The Importance of Professional Guidance in GST Termination
The termination of generation-skipping trusts isn’t something you should attempt without professional guidance. Even if you’re confident in your knowledge of generation-skipping trust rules, mistakes are still possible.
What seems like a small mistake now could lead to enormous tax bills (and immense confusion) for future generations. Even honest mistakes can land you in trouble, but if the IRS suspects that you are deliberately trying to avoid taxes, you could face both civil and criminal penalties.
Generation-skipping trusts are an incredibly complex area of law. Because there’s so much overlap between tax law and estate planning, it’s wise to seek guidance from both your estate planning attorney and your tax professional. If you don’t already have a clear strategy in mind, a financial advisor could help you make sense of the big picture.
Considering Terminating a Generation-Skipping Trust?
Don’t take the risk of terminating a GST on your own. The team at Hunter Sargent, PLLC, has been helping Texas families like yours for seven generations. We understand how important it is to preserve wealth for future generations, and we’ll develop a customized estate planning strategy to help you achieve your goals.
If you anticipate handling the termination of generation-skipping trusts in the future — or if you’re looking for guidance on any other aspect of estate planning — our team is here for you. Get in touch today to schedule a meeting.