Dynasty Trust and the $15M GST Exemption: Real Estate Rules

What the $15,000,000 is, and what it is not

The generation-skipping transfer tax is a second tax on top of the estate and gift tax. It applies when property moves to a “skip person”, generally someone two or more generations below the transferor, directly or through a trust. The Code defines three events: a direct skip (a gift or bequest to a skip person), a taxable distribution (a trust payout to a skip person) and a taxable termination (the end of an interest in a trust when only skip persons remain). Section 2612(a)(1) defines the last as the termination of an interest in trust property “unless” a non-skip person then has an interest in it. The tax rate is the top estate tax rate, 40%, times the “inclusion ratio” (section 2641(a)).

Every individual gets an exemption to put against it. Section 2631(c) says the exemption “shall be equal to the basic exclusion amount under section 2010(c)”, and Rev. Proc. 2025-32 confirms the number: “For calendar year 2026, the generation-skipping transfer exemption amount under § 2631(c) is equal to $15,000,000.” Our estate tax exemption guide has the story of the 2025 law that set the $15,000,000 base.

The GST exemption since 2012 (Instructions for Form 709 (2025); Rev. Proc. 2025-32):

The Form 709 instructions add a rule that matters for a family that funded a trust years ago: “each annual increase can only be allocated to transfers made (or appreciation occurring) during or after the year of the increase.” A donor with a trust that was funded earlier and that could still make a skip can add new exemption to it; a transfer that is already a completed skip cannot be reached.

It does not pass to your spouse

Estate and gift tax has portability: a surviving spouse can add the “deceased spousal unused exclusion amount” to their own (section 2010(c)(2)(B), (c)(4)). The GST exemption has no such step. Section 2631(c) ties it to the “basic exclusion amount”, the first of the two parts of the applicable exclusion amount, and the Form 709 instructions say that every donor “is allowed a lifetime GST exemption” (our reading: nothing in either text lets a surviving spouse add the deceased spouse’s unused GST exemption).

Two tools in the Code partly fill the gap. Spouses can split a gift, and the split counts for GST purposes (section 2652(a)(2)). And for a QTIP trust, the estate of the first spouse to die can elect to treat the trust as if the QTIP election had not been made for GST purposes only (section 2652(a)(3)), which lets the first spouse’s exemption be allocated to it (our reading). Our estate tax exemption guide explains portability for the estate and gift tax, and the ILIT page covers the other trust most estates meet first: irrevocable life insurance trust at $15 million.

Example: the first spouse’s exemption goes unused (our arithmetic). A couple has $30,000,000. The first spouse to die leaves everything outright to the survivor and the executor elects portability. The survivor now has $30,000,000 of estate tax exclusion but only their own $15,000,000 of GST exemption. If the survivor puts $30,000,000 into a dynasty trust, $15,000,000 of exemption covers half: the inclusion ratio is 1 - 15,000,000 / 30,000,000 = 0.5 and the applicable rate is 40% x 0.5 = 20%. A later taxable termination of the full $30,000,000 would carry $6,000,000 of GST tax. Had the first spouse’s executor allocated their exemption to a trust at death, the ratio would have been 0 on both halves.

How the exemption gets onto the trust

Allocation is a filing, not a feature of the trust. The Code sets four routes:

The timely return is the one that protects the family. Under section 2642(b)(1), an allocation on a gift tax return filed on time uses the value finally determined for gift tax and is effective from the date of the transfer. Form 709 is due April 15 of the year after the gift (Instructions for Form 709 (2025)), and it must be filed for gifts in trust that are future interests even when they are under $19,000. The instructions warn that a transfer to a trust “may be subject to the GST tax at a later date” even when it is less than the annual exclusion. Our Form 709 page for illiquid real estate interests covers valuing a gift of a partnership or LLC interest.

What “inclusion ratio” does to the same $15,000,000

Section 2642(a) defines the inclusion ratio as 1 minus the “applicable fraction”, which is the exemption allocated divided by the value transferred. The rate on a skip is 40% times that ratio.

Funding a trust against a $15,000,000 exemption (our arithmetic; GST rate = 40% x inclusion ratio):

Two readings. A trust with a ratio between 0 and 1 is a mixed trust, and the Code lets it be split into an exempt and a non-exempt trust (section 2642(a)(3)); that is a drafting question for the trust’s lawyer. And because the exemption is measured against value on the day of the gift, the asset matters: $15,000,000 allocated to a building worth $15,000,000 today covers the building’s whole later value, however far it grows.

How long can the trust last? Five state statutes, read in full

A federal exemption means little if the trust must end when the lives named in it end. The old common-law rule against perpetuities forces a trust to vest or end within a life in being plus 21 years. States have changed that for trusts. We opened the statute of each state below; we could not open some other states’ official sites from our location and did not rely on summaries for them.

Duration rules for trusts, from the statute text (as of October 21, 2026):

What the table changes about the usual summary that “these states abolished the rule against perpetuities”: only some did. Delaware and Wyoming still limit real property, and Wyoming and Florida write a number of years instead of removing the limit. South Dakota and Alaska keep a power-of-sale condition on the suspension of alienation, which a dynasty trust holding real estate should satisfy by giving the trustee a power to sell. We did not read Nevada, New Hampshire, Ohio, Illinois, Tennessee, Utah, Idaho or New York in the statute and do not put them in the table.

A trust can be governed by one state’s law and own property in another. The statute tells you the duration rule that state’s courts apply; it does not tell you how the state where the building stands treats a deed to the trustee or taxes the trust’s rent. That is a question for the trust’s lawyer and tax preparer.

What real estate does inside a dynasty trust

The basis does not reset

A dynasty trust is a bet that the estate tax saved over generations is worth more than the basis forgone. Property given to a trust has the donor’s basis (section 1015(a)); the step-up in section 1014(a) applies to property “required to be included” in the decedent’s gross estate (section 1014(b)(9)), and a completed gift to a trust that is not included does not qualify. Our step-up in basis guide covers the usual case.

Example: the trust sells a building (our arithmetic). A building is worth $10,000,000 when it is given to the trust. The donor’s basis is $3,500,000 after $2,500,000 of depreciation. The trust sells for $10,000,000. The gain is $6,500,000, of which $2,500,000 is unrecaptured section 1250 gain, taxed at up to 25% (section 1(h)(1)(E)): $625,000. The other $4,000,000 is taxed at 20% (section 1(h)(1)(D)), which applies to a trust above $16,250 of income (Rev. Proc. 2025-32, section 4.03): $800,000. The 3.8% tax on undistributed net investment income (section 1411(a)(2)) adds $247,000. Total federal tax: $1,672,000. If the same building had been held by someone whose estate was taxed on it at 40%, the estate tax would be $4,000,000 on $10,000,000, before any exemption. State taxes are excluded.

The comparison is not a verdict. The $4,000,000 only arises if the estate is over the exemption, and a family under $15,000,000 per person owes neither. The point is that the price of a dynasty trust is paid in income tax on the asset that keeps its old basis, and it is paid by the trust whenever it sells.

Retained income is taxed in compressed brackets

For tax years beginning in 2026 an estate or trust pays 10% to $3,300, 24% to $11,700, 35% to $16,000 and 37% above $16,000 (Rev. Proc. 2025-32, section 4.01, Table 5). A single filer reaches 37% at $640,600, so the trust gets there 40 times sooner (our arithmetic). Our trust tax brackets page covers Form 1041, distributable net income and the 65-day election.

Example: $400,000 of net rent kept in the trust (our arithmetic). Tax is $3,851 + 37% x ($400,000 - $16,000) = $145,931. The net investment income tax is 3.8% x ($400,000 - $16,000) = $14,592. Total $160,523, or 40.1% of the income. Rent paid out to a beneficiary is taxed at the beneficiary’s rates instead; whether a payout to a grandchild is a taxable distribution for GST purposes depends on the inclusion ratio of the trust, which is why the ratio is worth knowing before the first distribution.

What a century of compounding does (our arithmetic)

Because a trust with an inclusion ratio of zero can skip the estate tax at each generation, the trade-off grows with time. Assumptions: $15,000,000 put in once in 2026; a steady 5% a year after expenses and income tax; no payouts; three generation changes at years 30, 60 and 90; and a 40% tax on the full value at each, which is the rate for an estate already above the exemption. Results are a model, not a forecast.

The last column is always 21.6% of the first, because three 40% taxes leave 0.6 x 0.6 x 0.6. Any family can find its own point: a family whose estates stay below the exemption at each generation owes nothing in the last column, and then the only difference between the columns is the basis cost above.

What a reader can do with this

What the documents let you check before talking to anyone:

• Count the exemption you have. Your own $15,000,000 for 2026, less every amount you have already allocated on a Form 709 (Schedule D Part 2 is the running record), and nothing from a spouse who has died.
• Check what was allocated automatically. If you have given to a trust that could ever pay a grandchild, ask whether it is a “GST trust” under section 2632(c)(3)(B). If so, exemption may already have been allocated on a Form 709 you filed, and an election out needs a statement on a timely return.
• Look at the asset, not only the amount. Real estate or a partnership interest held through an LLC is classified differently from a deed in Delaware (503(e)); in Wyoming the statute leaves the question open. A trust that owns a building and a trust that owns the LLC that owns it may have different durations.
• Price the basis. For each asset in the plan, write down the adjusted basis and the unrecaptured section 1250 gain, and compare the tax a sale would cost with the estate tax it would avoid, as in the building example above.
• Check the date on every Form 709. An allocation on a late return takes the value at the date of the filing (section 2642(b)(3)).

The decision, and who makes it. A dynasty trust is a trust instrument drafted by an estate-planning attorney in the state whose law will govern it; the allocation is made on Form 709 by that attorney or a CPA; the sale of a building, the loan on it and the income it throws off are part of a plan that a financial adviser can model alongside retirement income. Nothing here is a recommendation to create one.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 21, 2026: 26 U.S.C. 1, 1014, 1015, 1411, 2001, 2010, 2041, 2501, 2503, 2601, 2611, 2612, 2613, 2631, 2632, 2641, 2642, 2651, 2652 and 2653, United States Code 2024 edition (govinfo.gov); Public Law 119-21, section 70106 (govinfo.gov); Rev. Proc. 2025-32 (irs.gov); 26 CFR 26.2601-1, 26.2612-1, 26.2632-1, 26.2642-1, 26.2642-2 and 26.2652-1 (eCFR, as of October 1, 2026); Instructions for Form 709 (2025) and Instructions for Form 706 (Rev. July 2026) (irs.gov); 25 Del. C. chapter 5 (delcode.delaware.gov); SDCL 43-5-1, 43-5-4 and 43-5-8 (sdlegislature.gov); Alaska Statutes 34.27.051 to 34.27.100 (akleg.gov); Wyoming Statutes Title 34 (wyoleg.gov); Florida Statutes 689.225, 2025 (flsenate.gov). The 2024 edition of the Code shows section 2010(c)(3) before the 2025 law; the $15,000,000 figure is from Public Law 119-21 and Rev. Proc. 2025-32. Examples, sums, ratios and the 100-year table are our arithmetic from a script saved in our working folder; the return, tax and payout assumptions are ours and are not a forecast. We could not open the official statutes of Nevada, New Hampshire, Ohio, Illinois, Tennessee, Utah, Idaho or New York and do not describe them. This is analysis of public documents, not investment, legal or tax advice.